Exchange-traded funds (ETFs) are emerging as a serious alternative to residential property, as tax changes, rising interest rates and affordability pressures reshape how Australians invest.
Long seen as the country’s go-to way to build wealth, property is now facing growing competition from low-cost, diversified sharemarket products, particularly as younger investors struggle to enter the housing market.
Speaking on the Savings Tip Jar podcast, The Motley Fool’s chief investment officer Scott Phillips said shares, particularly through low-cost, diversified vehicles like ETFs, may offer stronger long-term upside than property, challenging one of the country’s go-to investments.
“Do I think ETFs, exchange-traded funds, can become the residential property of the future? I hope so. I think the returns will be better,” he said.
A structural shift in investing
Part of the shift is being driven by changing policy settings, with recent capital gains tax and negative gearing reforms already influencing investor behaviour.
See also: Tax hit on young investors threaten housing fix
Investors shifted heavily into safer ETFs in June, with Betashares reporting about $1 billion flowed into cash and fixed income funds, more than double the previous month.
Nearly one-third of all money flowing into Australian ETFs in June went to cash and fixed income funds, the strongest allocation to the sector since November.
The surge reflects a broader pivot away from high-growth strategies, which are more exposed to both rising interest rates and less favourable tax treatment under the new capital gains regime.
Under the changes, capital gains will be taxed more heavily, while dividend income, particularly franked dividends, remains relatively tax-efficient.
That has boosted demand for income-focused ETFs and listed investment vehicles that can help smooth or reduce capital gains liabilities over time.
The broader ETF market is also expanding rapidly, with total inflows reaching more than $60 billion over the past financial year.
Mr Phillips argues the appeal of ETFs lies in their accessibility and growth potential.
“There’s a natural ceiling to property prices as a function of wages,” he said.
“The total stock market? There’s no ceiling because they can always grow internationally. They can buy another competitor. They can put another competitor out of business. They can produce new products. They can become more efficient. There’s a lot more potential for raw upside.”
Property’s grip remains strong
Despite growing interest in ETFs, property remains deeply embedded in Australia’s investment culture, supported by tax settings, leverage and decades of strong capital growth.
Housing analysts have long noted that property’s performance since the 1980s has been driven by falling interest rates, population growth and constrained supply – factors that may not be as supportive in the future, but still underpin demand.
At the same time, shares can be more volatile, with sharp downturns testing investor discipline.
”I understand that fear is real… it’s a very rational fear,” Mr Phillips said.
“But the market has always over 125 years gained more than it lost… that doesn’t mean it’s not going to be volatile. So be ready for those big gut-wrenching, freakout falls, because it’ll happen.
“I knew that I would feel this way and I would decide to invest anyway because history tells us it’s always been the right decision to make so confront those fears, accept those fears and understand them.”
