Australian investors abandon stock picking for ETFs as AI competition and Labor capital gains tax changes bite

Stock picking is becoming a loser’s game for ordinary Australian investors, squeezed by higher capital gains taxes and competition to find the next huge winner from artificial intelligence.

As machines beat human intelligence and tax changes see the government take a large share of any profits, mum-and-dad investors, retirees and younger generations are increasingly turning to exchange-traded funds (ETFs) to own the market.

ETFs track share market indices such as the S&P/ASX 200 or Wall Street’s tech-heavy Nasdaq and give investors exposure to a basket of companies, without having to pick individual stocks.

A price war between Australian ETF providers is also driving fees towards rock bottom, as the industry tracks to another record year of inflows in 2026.

Fees for some index-tracking ETFs have fallen as low as 0.05 per cent a year, although products targeting specialised sectors such as cybersecurity, defence, semiconductors and copper tend to charge more.

Marc Jocum, an Investment Strategist at Global X ETFs, points to research by Hendrik Bessembinder, a professor of finance at Arizona State University, which shows 58 per cent of 28,114 stocks traded in the US since 1926 lost investors money.

The research also highlights the difficulty of identifying the relatively small number of companies that generate most of the market’s long-term gains, with around 67 per cent of stocks shown to underperform the index.

“In my view, stock picking is a loser’s game,” says Jocum.

“With an ETF you don’t need to stock pick and find the needle in the haystack, you just need to own the haystack.

The argument is at the heart of the passive investment boom. Rather than spending time trying to find the next Nvidia or Commonwealth Bank, investors can simply buy a fund that tracks the market’s winners over the long term.

“If you’re working out at the gym, or want to lose weight, you need to train and put in the hours,” says Jocum. “But with an ETF, the less hours you put in the better the results.”

Baby Boomers to Gen Z jump in

The growth of ETFs is also pressuring the traditional gravy train of the funds management industry, which has been forced to cut fees and introduce exchange-traded products of its own to compete for investors.

The big prize for the industry is older investors nearing retirement who typically have hundreds of thousands of dollars to invest, often via their superannuation.

Older, wealthier investors often employ financial advisers and favour income- or dividend-oriented strategies.

Whereas younger or Gen X investors are more likely to consider growth options or popular themes.

Most of the money flowing into ETFs is still directed towards low-cost, index-tracking products. But investors are also using the funds to make bets on broader economic and investment themes.

“Copper is a popular thematic in Australia and we’ve seen dip buying in gold over the last month,” Jocum says. “We’ve also seen money come into the picks and shovels of AI as a transformative technology. So, AI infrastructure and semiconductors.”

Morningstar data shows Australian ETFs posted $12.8 billion in net inflows over the second quarter of 2026. ETFs tracking equities received the lion’s share at $10.4 billion, with fixed-income strategies at $2.4 billion.

Vanguard, Betashares and Blackrock are the three dominant providers by total assets under management. A host of homegrown or international rivals also compete, including Global X, ETF Shares, and VanEck.

Traditional stock-picking giants such as Magellan and Hyperion Asset Management also now market lower-fee funds on exchanges in a response to the growth of passive investing.

Direct stock picking under threat

The Labor Government’s decision to hike taxes across the board on share market gains irrespective of size has also pushed more investors into income-oriented strategies, according to Jocum.

“Even now in Australia, I think these tax changes are going to kill direct stock picking overall and the natural beneficiaries are funds such as ETFs,” he says.

Under the changes, due to take effect from July 1, 2027, investors will no longer receive the existing 50 per cent capital gains tax discount on shares, with effective tax rates on gains reaching 30 per cent to 47 per cent depending on the investor’s marginal tax rate.

The changes add another consideration for investors weighing whether to risk buying individual stocks in pursuit of higher gains, or to forget about it and buy a low-fee fund.

But the rise of passive investing is not without its critics.

One concern is that the industry’s success in attracting funds means it is now artificially distorting the valuation of companies it is designed to follow.

If a company joins a large index such as the S&P/ASX 200, its valuation tends to rise as the ETF providers must buy its shares, regardless of their price.

This has resulted in hedge funds looking to buy shares in a company before it is added to an index. After it is added, the hedge fund sells the shares to the ETF at a higher price to pocket the difference as a profit.

Other critics argue that some providers are too willing to package whatever investment theme is attracting attention, helping gather fee-earning funds under management.

The concern is that new products can be launched to capitalise on retail investor enthusiasm rather than the underlying investment case, potentially leaving less-sophisticated investors exposed to fashionable sectors at inflated valuations.