Why ETFs Are A Friend Of ASX Stocks

The CEO’s furrowed brow betrays a growing concern. As she scans reports highlighting the surging popularity of Exchange Traded Funds (ETFs), a nagging fear takes root. Are these investment vehicles taking away investor dollars from her ASX company?

Her apprehension is not unfounded on the surface. ETFs, with their allure of diversification, low fees, and convenient trading, have become the growth area of the investment world.

Globally, billions flow into these thematic baskets, seemingly bypassing individual companies like hers. This raises a question: are ETFs a wolf in sheep’s clothing, starving individual stocks of much-needed investment?

At first pass, the CEO’s perspective has merit. With less money directly targeting individual companies, valuations, and capital raisings might take a hit. Investor engagement, often fueled by direct ownership, could dwindle, impacting brand awareness and valuable feedback channels.

Additionally, ETFs, driven by broader market movements, can introduce short-term volatility into the stock price, creating an additional layer of uncertainty.

Synergistic benefits

However, painting a solely negative picture would be like viewing the world through a small prism. The ETF boom also presents opportunities. A rising tide lifts all boats.

A CEO can leverage the overall market expansion fueled by ETFs to attract new investors to an ASX stock by doing several things including differentiation of their stock offering.

More readily appealing to certain demographics assists the CEO in her cause.

ETFs, by democratizing access and offering diversification, can expand the potential investor pool for her. Investors don’t necessarily avoid individual companies because of ETFs.

Their choices are often driven by performance and asset allocation goals, not a deliberate snub against specific firms. A company with strong fundamentals, a compelling story, and news flow will naturally attract investors regardless of the surrounding ETF narrative.

Adapt to the evolving investment landscape

The key lies in adaptation. Instead of lamenting the changing landscape, the CEO can turn it into an advantage. Flipping the equation, a company can view the ETF investor as a prize. They are already comfortable with the process of investment in an ASX-listed ETF.

Investing in an ASX-listed stock has many of the same hallmarks.

By focusing on innovation, transparency, and delivering consistent growth and value, her company can stand out in the ETF age.

By taking a holistic view, acknowledging both challenges and opportunities and embracing strategic adaptation, companies can not only survive but thrive in the evolving investment landscape.

Further evidence

Concerns sometimes emerge about whether ETFs impact the prices of their underlying stocks.  According to a study from Blackrock, the answer is no.

This is because most trading happens directly on exchanges between ETF buyers and sellers, rather than involving the underlying stocks themselves.

Therefore, investor demand adjustments typically occur within the ETF structure, without requiring buy/sell trades in individual stocks.

After all, it was not so long ago when it was thought that superannuation funds would spell the death knell of the flow of funds into individual ASX stocks.

As we know, this is not the case.

Help is on its way

At Juststocks – we can assist companies to leverage the investor popularity of ETFs with proprietary tools.





Data shown on Comparisons of ETFs is sourced by JustStocks employees from the websites of ETF providers, individual Product Disclosure Statements, and historical price data information. All rights reserved. JustStocks does not guarantee the data or content contained herein to be accurate, complete, or timely.

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