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Australian ETF News 

Wall Street’s Rush to Launch Vanguard-Style Dual Listed Funds Draws Warnings
The US Securities and Exchange Commission is expected to approve applications for dual-share-class structures, allowing managers to add an ETF sleeve to an existing mutual fund, which could bring the two vehicles closer together. More than 50 firms, including BlackRock Inc. and State Street Corp., are waiting for the regulator’s greenlight to deploy the hybrid structure — made possible after Vanguard Group Inc.’s exclusive patent expired two years ago.

The two-in-one blueprint is a tantalizing prospect for asset managers looking to break into the ETF market at scale, without having to launch a new strategy from scratch. It also offers a lifeline to firms
battered by years of mutual-fund outflows, as investors fled for more tax-efficient alternatives and the convenience of daily liquidity. The hybrid structure famously helped Vanguard save its clients billions in taxes over two decades.

But there are two key concerns. First, some Wall Street experts caution the shake-up could erode key benefits of the wrapper, especially if hybrid funds face significant withdrawals during market stress.
Second, At the heart of the concern is a tax dynamic that ETFs were built to avoid. These funds rarely pay capital-gains tax distributions, thanks to their in-kind redemption process, which allows the issuer to swap securities with authorized participants rather than sell them outright. By contrast, mutual funds redeem in cash, meaning managers may need to sell securities to meet outflows. If those sales generate capital gains, they may distribute them to investors. In a hybrid vehicle, those taxable gains risk getting passed onto ETF shareholders too.

Newly Minted ETFs Buck Vanguard Effect as Fees Hit Record High
The average fee of an exchange-traded fund launched this year has surged to a record 65 bps, with leveraged trades, cryptocurrency, and active management among the slew of nearly 350 new offerings. That said, despite the high fees of new ETFs, the average asset-weighted expense ratio across all funds is falling and hovering around its lowest level on record, at 17.5 bps. Paradoxically, the all-time high costs can be linked back to the race toward lower fees among the highest ranks of the ETF league tables. Fund giants like the Vanguard Group, BlackRock Inc. and State Street Corp. have spent years slashing fees, or expense ratios, on their index-tracking, core portfolio funds to near zero, in an effort to attract new investors. But as the so-called Vanguard Effect has lowered fees for investors, it in turn has given them the resources to allocate a slice of their portfolios to more expensive, niche funds.
The scale and efficiency of ultra-low-cost products have helped subsidize the expansion of higher-fee offerings elsewhere, supporting broader innovation and diversification across the ETF landscape.
The Deep Dive – How Flows Effect ETF Factor Performance
There is a host of factor related ETFs, and for good reason. Many investors think asset class, geographic, sector, market cap exposures or thematic exposures. Less so understanding market performance on a factor basis. For example, during the downturn between mid-February and the early part of April this year, outperformance was primarily driven by factors. And in particular, factors like lower beta, lower volatility, strength of balance sheet, stable profit margins, stable if not growing dividend yields outperformed. That is, a quality wrapper, but with that emphasis on the lower beta, lower volatility, those factors that tend not to do well when the market is ripping back on the upside.

Many investors know that the performance of factors like value or momentum declines if more investors put money at work in these factors. This is one of the key reasons why factor performance waxes and wanes over time. But thanks to a brilliant study by Nikolay Doskov, Thorsten Hens, and Klaus Reiner Schenk-Hoppé we can put some numbers to this effect. The paper is an absolute must read for every fund manager. They looked at all the stocks traded on the 14 largest stock exchanges in the world and formed portfolios based on the different factors as well as passive portfolios that just replicate the market. They considered both long-short and long only factor portfolios, but I will only deal with long only portfolios here. Then, in each month from 1995 to the end of 2020, they track the performance of each stock and check which stocks move in and out of the different factor portfolios. This way, they can simulate how investor flows change different factor portfolios over time and how in the medium- to long-term these flows change the returns of different factors.

Here is what they estimate happens to the returns of the four main factors – value, small cap or size, momentum, and quality – if 1% of the total market is shifted into these factor portfolios. Note that the total market cap of the stocks in their study is about $60 trillion, so 1% corresponds to net inflows from passive strategies to these factors of c.$600bn worldwide.

As evident in Figure 1, the returns of the value factor are reduced by only 2% p.a while momentum returns decline by about 8.6%. If investors chase the best performers of the past, they quickly reduce the returns of momentum strategies because they push the prices of expensive stocks even higher. Meanwhile, if investors move into cheap value stocks, they reduce the potential future return by much less because these stocks remain cheap – and thus poised for future outperformance – even after the inflows.

Intuitively, one could interpret this as value and small cap portfolios having higher capacity – meaning they can digest more inflows before their outperformance disappears. But this is not true because different factors have different long-term performance. If we turn the calculation around and ask what percentage of the total market needs to move into the factor portfolios before the outperformance disappears, we get the chart in Figure 2.

Because the average outperformance of value strategies vs, the market is much smaller than the average outperformance of momentum portfolios. In the end, value and small cap strategies have the least capacity and their outperformance tends to disappear if a mere 0.17% of the total market cap (c.$102bn) and 0.07% of market cap (c.$42bn) flow into these factors globally.

What is particularly interesting, though, is that the study also estimates cross-factor impacts. If more money flows into momentum stocks, the expensive stocks tend to get more expensive while the cheap stocks tend to get cheaper. This should increase the return potential for value investors.

 US ETF Flows by Asset Class 

 The value of ETF flows data is relatively obvious – it highlights asset class inflows and outflows. As such, it illustrates investor asset class preferences at any given time. Relative to the ASX data, which is monthly, US data is available on both a more frequent and timely basis.  The data below is as at 22 May 2025. 

Global Select ETF Launches

New issue ETFs reflect ‘real-time’ investment theme investor sentiment. i.e, what’s ‘hot’. Additionally, the largest Australian ETF issues are all part of large international entities. And often what ETF is issued in their home markets and, to some degree, subsequently issued in Australia.

Regarding the table below, there are several distinct themes reflecting investor preferences currently:

• German equities ETFs – Germany has been running hot all of 2025. Initially it was a relative value play vs the US. Then it became a defense sector play as well as the major theme of a diversification away from the US.
• Income related ETFs – defensive, fixed income products, partly reflecting the more defensive or at least diversification of portfolios given a range of uncertainties, particularly in the US and in US equities.
• The Innovator Capital Management launched the Innovator Equity Managed 100 Buffer ETF is an interesting product. It is an actively managed solution that seeks to provide 100% downside protection through a one-year laddered options portfolio. It is reflective of many ETFs that have been issued over the circa last 4-6 weeks particularly in the US – equities exposure but with either downside preservation or downside protection.
• Global / international equities ETFs. Same theme – diversification away from the US.
• Franklin Templeton to convert 10 Putnam Municipal Bond mutual funds to ETFs. I wonder why. These is a very common dynamic these days

Select ETF Launches, for May 8th to 22nd 2025 .xls

Figure : Select ETF Launches, for May 8th to 22nd 2025
Select European ETF Launches
STOXX launches DAX Composite Indices
First Trust launches three ETFs on Deutsche Börse
Crédit Agricole and Solactive launch Solactive Constant Maturity Government Bond Index Family
Janus Henderson launches UCITS mortgage-backed securities ETF
Franklin Templeton to convert 10 Putnam Municipal Bond mutual funds to ETFs
Select US ETF Launches
Vontobel Asset Management, Inc. launched the Vontobel International Equity Active ETF
Lazard Asset Management converted the Lazard International Equity Advantage mutual fund into an ETF
Innovator Capital Management launched the Innovator Equity Managed 100 Buffer ETF
Russell Global Infrastructure Active ETF