Australian investors are increasingly turning away from individual stock-picking and towards exchange-traded funds (ETFs), as artificial intelligence, proposed capital gains tax changes and intense competition between fund providers reshape the market.
ETFs offer investors exposure to a basket of shares, sectors or markets through a single trade, usually at a lower cost than actively managed funds. The combination of diversification and rock-bottom fees has made them an increasingly attractive alternative for people unwilling to gamble on finding the next big winner.
Demand has also been driven by the rapid arrival of AI-related investment products. VanEck recently launched what it described as Australia’s first generative AI-powered international equity ETF, designed to use machine learning to identify and adjust its holdings.
The development underlines the growing competition faced by traditional stock-pickers, who must now compete not only with broad market-tracking funds but also with investment strategies built around powerful computing and automated analysis.
ETF market expands as tax debate intensifies
The Australian Securities Exchange added 72 new ETFs during the latest financial year, up from 50 the year before, according to ABC reporting. The sector held about A$350 billion in assets by May, while ETF trading activity rose by 26 per cent over the same period.
Rory Cunningham, a senior manager at the ASX, said interest was being supported by the products’ accessibility, diversification and low cost. Around 550,000 Australians aged between 18 and 34 are now invested in ETFs, he said.
Tax policy is adding another incentive for some investors to reassess their portfolios. Labor’s proposed changes would replace the existing 50 per cent capital gains tax discount with cost-base indexation and introduce a 30 per cent minimum tax on capital gains accruing after 1 July 2027.
The Financial Services Council has warned that the reforms could increase the effective tax rate on long-term investments in shares, ETFs and managed funds, particularly where returns significantly outpace inflation.
Global X said its May flow data showed Australian share ETFs attracted a record A$2.3 billion in net inflows. Yield-focused ETFs drew A$243 million, their strongest monthly result, as investors sought returns based more heavily on dividends and income than on capital growth.
“Investor behaviour in May points to a clear pivot,” said Marc Jocum, senior product and investment strategist at Global X ETFs, adding that the proposed reforms had sharpened attention on after-tax returns.
However, the rapid expansion of the sector has raised concerns that not every ETF offers meaningful diversification. Investors can end up holding several funds with similar underlying shares without realising it, while some narrowly focused products may leave them heavily exposed to a single theme.
Forager Funds chief investment officer Steve Johnson has described some of the newest AI-focused products as “gambling ETFs”, arguing that they allow investors to chase whichever technology trend is currently attracting the most attention.
Even so, the flow of money into ETFs shows that many Australians are choosing a simpler and cheaper route into the market rather than attempting to identify individual companies capable of outperforming their peers.
