Lessons from 25 years of ETFs in Australia

The launch of ETFs Down Under back in 2001 helped reshape how Australian investors access markets, build portfolios and invest for the future.

ETFs first hit the ASX in August 2001, when State Street Investment Management launched the State Street SPDR S&P/ASX 200 ETF (STW) and State Street SPDR S&P/ASX 50 ETF (SFY).

Since listing, the value of a hypothetical $10,000 investment in STW and SFY has grown substantially, reaching $70,889 and $68,544 respectively as of 31 July.

“I’m incredibly proud of what State Street has achieved in the last 25 years, and I’m proud of the industry and the way the industry has been both innovative and responsible, and how products have been developed,” head of investment’s, Jonathan Shead, told Money Management’s sister brand Investor Daily.

“It takes a village to run an ETF. There’s a whole village within the financial community that has worked over the last 25 years to make this product available. And it’s nice to be able to say the financial services industry got one thing right.”

Shead has been there since the beginning, when the acronym confused more than the average Aussie.

“We used to ask new employees if they could tell us what an ETF was. And in those early years, nine times out of 10, we would get “electronic transfer of funds” – EFT, right?,” he told Investor Daily.

“Whereas now, my kids – my adult children – know what an ETF is. And to me, that indicates a little seismic shift.”

ASX senior manager for investment products, Rory Cunningham, said the evolution of ETFs didn’t happen overnight.

“There’s a lot of people like John that were there at the beginning of the ETF market and they had to work quite hard to figure out how to bring a product structure and make it fit within our rules and regulations, exchange rules, operational processes, downstream considerations for investors,” he said.

Shead, who is retiring on 28 August, said the introduction of ETFs in August 2001 helped solve two key issues.

“The first was an investor problem, where things like a lack of transparency, high cost and poor liquidity of some products were problems we thought could be solved. We were very vocal in those early years about those benefits: low cost, transparent, liquid, traded on the exchange and so on,” Shead told Investor Daily, adding that there was also a technical market-efficiency opportunity.

“This was where your classic ‘own everything’ ETF that holds the ASX 200, and there’s also a futures contract and the underlying physical shares – it was an opportunity for brokers and market makers to fine-tune market pricing across those three.

As of 31 July, there were 457 ETFs listed on ASX with more than $360 billion in assets, following a record FY26 in which 72 new ETFs were listed, the highest annual total to date.

“I’d love to say that I saw this coming, but to be honest, I didn’t,” Shead said in response to the success of the financial product.

“The number of ETFs has grown as people have found new ways to use them … the early passive, “own the whole market” kind of ETFs have now morphed into owning a part of the market, or a particular style, or a particular geography, and more recently a particular thematic.”

The ASX said ETFs have moved from a relatively unfamiliar investment structure to a mainstream part of Australia’s listed investment market.

“Over 50 per cent of Australians now invest and those investors – it’d be hard-pressed to find an investor that doesn’t know what an ETF is,” Cunningham said. “It’s also helped people build more robust, diversified portfolios.”

ETF innovations

Yearly innovations were also crucial to the industry’s success.

“Things like, for example, what happens if the underlying share doesn’t trade in Australia, but trades in the US when everyone’s asleep? What happens if the security doesn’t even trade, like a bond? And all of those problems were progressively solved within the industry and changed the perception.”

Cunningham said over a quarter of a century, Australia has been both a learner and a leader in the industry.

“For example, active ETFs – we have a very flexible arrangement for the ability for active managers to come onto the ASX in an ETF wrapper, still protect their intellectual property, and we were one of the first markets in the world to take that approach,” he said.

“In some respects, [there are] other markets to learn from us, but then on the flip side, we’re looking to overseas markets and learning what they’re doing.”

One of the biggest hurdles in convincing investors and advisers to embrace ETFs in the early years was infrastructure, Shead highlighted, as most investors didn’t have a broker account – and most advisers were used to dealing with managed funds.

“The next hurdle was the fact that the advice community at the time was largely paid by commission, and so they needed to restructure their financial models to make it happen. That was a significant hurdle,” he added, saying that the benefits of passive management were also not widely understood at the time.

“A story about the great things an active manager is going to do for you is more humanly appealing than some technical story about arbitrage and passive management,” he said,

“So those, I think, were the main impediments in the early years.”

The biggest driver of the explosive growth in ETFs, according to Shead, is a combination of lower cost, transparency, technology and financial education.

“Something else that has been crucial, I think, has been the emergence of competitors, much as I hate to say,” he told Investor Daily. “I think when advisers and investors saw that there were major global financial firms wanting to launch ETFs, they realised that there was something to see here.”

Shead added that international equities are the one ETF class that he believes have had the most impact on investor consciousness, “because all of a sudden you could get instant exposure to the US, settling in Australian dollars in an Australian time zone.”

He highlighted some of the biggest misconceptions around ETFs: “Once we got past “electronic funds transfer”, the biggest misconception is that an ETF is an investment strategy,” Shead said.

Adding, “people say, “What’s your investment strategy?” – “I buy ETFs.” …That’s like going on a shopping trip, going to David Jones and buying a box. Well, that’s a meaningless exercise. You need to know what is inside the box,” he told Investor Daily.

“People have a sense that an ETF is an investment strategy. It’s not. It’s just a toolbox that delivers an investment strategy.”

As Shead prepares to wind down his career, he reflected on what became a huge chapter of his career.

“The thing I’m most proud of is that this is a financial product that has a three-letter acronym that promises to do wonderful technical things, and it’s delivered what it said it would do.

“And it’s delivered what it said it would do through the financial crisis, through the European sovereign debt crisis, through Brexit, through COVID,” he told Investor Daily.

“And the fact that ETFs have delivered on their promise, I think is a tremendous credit not only to State Street, but to the wider ETF industry as well … it’s also, I might add, a credit to the ASX and to ASIC, who have been pretty diligent watching this industry emerge and making sure that appropriate guardrails are in place.”