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Indexing in Australia in 2023 reached almost $760 billion, equivalent to 23% of investment management funds under management (FUM), according to research from Rainmaker Information’s Institutional Roundup Report.
Indexed investments represented 18% of investing management FUM a decade ago.
“Indexing routinely grows one-third faster than the broad investment market,” said Alex Dunnin, executive director of research and compliance at Rainmaker Information.
“Within some asset classes, this will make indexing the default investment style, adding pressure on the business models of active managers.”
The entire exchange traded fund (ETF) market is equivalent to just 4% of the whole investment market, though it is 18% of the indexed FUM market.
“It’s clear that the growth of ETFs goes nowhere near explaining the indexing phenomenon,” said Dunnin.
“Instead, the power of ETFs is that they dramatically simplify how retail and wholesale investors can access the low-cost, high-value investment sector.”
Reiterating this, in the 12 months to 30 September, exchange traded products had net flows of $10.8 billion, while managed funds, had negative net flows of $26.8 billion.
Equities make up 70% of indexed FUM, fixed interest makes up 13%, with the balance held across property, cash and alternatives.
79% of indexed FUM is held in growth assets, according to Rainmaker Information.
While 23% of the overall FUM market is indexed, 37% of equities FUM is indexed, which has grown from 30% in the last five years.
The indexing penetration ratio of Australian equities is 29% and a staggering 45% for international equities.
The ratios for fixed interest are a more tempered with 17%, and 10% for all other asset classes.
Despite the market growth, the indexed investment management market is extremely concentrated.
“State Street Global Advisors, Vanguard and BlackRock hold 68% of the indexed FUM market, however this ratio varies greatly by asset class.”
“The ‘Big-3’ hold 73% in international equities but 58% in Australian equities, while in asset classes with low indexing ratios the ‘Big-3’ concentration is even greater, surpassing 80%,” said Dunnin.
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Total risk market inflows were down a marginal 0.6% over the year to June 2024, decreasing from $18.3 billion to $18.2 billion.
Dual access ETPs, which are transacted both on stock exchanges and off-market through funds managers, can cost four times as much as the rest of the Australian ETP market.
