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How to…decide whether ETFs are right for your clients

With the products enjoying a bumper 2018, three experts discuss the ways to get the best out of them

Exchange-traded funds reached a new high last year, when a record number – 323 – were listed on the London Stock Exchange. In November, the Investment Association jumped on the bandwagon and proposed the inclusion of ETFs in its sectors. For advisers thinking about making use of this vehicle, Legal & General Investment Management head of ETFs Howie Li says: “Try it out and understand how it feels, and how it sits along with your investments.”

Dechert financial services and investment management partner Monica Gogna recommends the IA’s guide to ETFs as a good starting point for advisers wishing to begin using them.

Li, Gogna and Morningstar Europe director of passive strategies and sustainability research Hortense Bioy talk to Money Marketing about how to weigh up whether ETFs are right for your clients.

What are the advantages that ETFs have over other types of vehicles?

Li: ETFs are a flexible tool to be used alongside mutual funds. Increasingly, we hear from our clients that they are using ETFs because they can see real-time price transparency. With ETFs, you can see their value at any time of day. They can serve as a liquidity tool.

From a risk management perspective, if you are expecting a 10 per cent downturn in a market, being able to understand what is the best price at 9:30 and 10:30 makes a lot of difference.

Gogna: ETFs have a skill in that there is a really broad range of underlying assets they invest in.

That is an exciting space for an adviser who is looking to define a suitable price point, but with exposure to some interesting assets.  Due to the nature of ETFs, they really open up the types of investments you can make, but in a safer way.

Bioy: The benefits of ETFs are well-known. Namely, they are low-cost. You can find ETFs that are very cheap and, in some cases, cheaper than index funds.

ETFs offer intraday flexibility and visibility, when you can see the price of your investment at any point in the day. You can trade at any time; the breadth of choice is very wide in the ETF space. In recent years, there has been more innovation in the ETF space than in the index fund space. They are very versatile; you can use them in any way you want. You can use them tactically and strategically. You can hold them forever.

What are some of the current trends in the ETF space?

Gogna: ETFs are getting on the radar of regulators, but in a good way. Advisers are now looking to ensure that the products are appropriate and ensuring they understand more about them.

There are a number of regulatory rules that have come out in the past few years, which have helped the disclosure level. So I think that is good for advisers who are trying to understand something more about the products.

Li: The industry as a whole has digitised. There are more innovative solutions, such as thematic ETFs, in which you’re exposed to a basket of companies which will give you long-term exposure to robotics or batteries, for example.

Traditionally, discretionary fund managers used funds. But in the past two years, they have been using funds and ETFs interchangeably.

Bioy: In recent years, there has been more innovation in ETFs than in the index space. We have seen different themes, such as smart beta, thematic ETFs, and environmental, social and governance.

What are the downsides that come with using ETFs in a portfolio?

Bioy: The issue with the UK is that there are not many platforms that facilitate ETF trading, and that is why index funds tend to be more popular within the adviser community. This is changing but, at the moment, there are still issues.

This is just one of the barriers to ETFs in the UK; platforms are not facilitating intraday trading.

Intraday liquidity can be seen as a double-edged sword, as Jack Bogle [founder of Vanguard who passed away in January] used to say. Bogle wasn’t a big fan of ETFs. He was the grandfather of index funds, but he thought that ETFs could provide an incentive for investors to speculate.

He was all for low-cost and long-term investing. Although ETFs are low-cost, he thought that when you can trade them many times, it may lead to too frequent and unnecessary trading. That would be the main disadvantage. And maybe some product proliferation.

There is a lot of innovation, but then you wonder whether investors need so many products.


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