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Australian A$2.2t pension pot spurs record ETF demand

[HONG KONG] Australia's A$2.2 trillion (S$2.35 trillion) retirement savings pot is fueling record demand for exchange-traded funds in the nation.

The number of do-it-yourself pension accounts holding ETFs surged to a record 100,000 in September, according to a report from BetaShares Capital Ltd and Investment Trends Pty.

Self-managed retirement savings accounts worth A$635 billion are stoking hunger for income-producing assets and drove a 31 per cent surge in the number of Australian investors who used ETFs last year.

Australia's record-low interest rates are prompting pensioners to consider alternative products as returns on traditional investments slump.

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Australia's retirement savings market is the world's fourth largest, and do-it-yourself investors have increasing clout. Their investments help boost jobs and economic growth, Australia's Minister for Revenue and Financial Services Kelly O'Dwyer said last month.

"Income continues to be a very relevant theme with the low rates environment that Australia is experiencing," said Alex Vynokur, managing director at BetaShares in Sydney.

"The ability for Australians to generate income and at the same time manage risk and not suffer drawdowns when markets become volatile is important."

Australia ETF assets grew 3.6 per cent last month to hit a record of A$26.1 billion, according to BetaShares. DIY investors, whose assets make up about one third of the nation's pension pool, are seeking alternatives to managed funds that typically cost more than exchange-traded products.

Two of the three funds with the most inflows this year are income products. The BetaShares Australian High Interest Cash ETF and the BetaShares Australian Dividend Harvester Fund have seen about US$110 million in inflows this year, according to Bloomberg data. The number of DIY investors in these funds has grown 50 per cent over the past 12 months to represent 40 per cent of assets, according to Mr Vynokur.

Over the 10 years ended Dec 31, 2016, more than 80 per cent of international equity funds in Australia along with bond funds tied to debt from the nation's borrowers under-performed their respective benchmarks, according to a report from S&P's Spiva scorecard.

Investment Concerns Not everyone believes ETF investing is the right approach for pensioners seeking safe returns.

"We're concerned about ETFs because they represent broader market indexes - both the good and the bad," said Matthew Walker, Sydney-based director of wealth advisory group, WLM Financial Services Pty.

"There are a lot of risks in the system with indexes at all time highs."

One third of ETF investors are currently retired with an average age of 51, and diversification was cited by 77 per cent of pension investors as the top reason to use such products, according to the BetaShares Investment Trends report.

"The major benefit that ETFs offer self-managed superannuation funds is instant diversification," said Damien Sherman, head of ETF Capital Markets, Vanguard Group Inc in Australia.

"It's pretty common to see a pension portfolio concentrated in a handful of Australian shares, and that concentration can mean those portfolios are vulnerable to stock specific risk."