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T Bailey disputes low-cost claims for ETFs

T Bailey says exchange traded funds can be useful in multi-manager portfolios but are not as cheap as people think.

The company says it uses ETFs to access markets where there are few, if any, active managers. It also uses them to get short-term exposure to areas where getting on and out of an actively managed fund quickly would be diffi- cult or disruptive to the underlying fund.

ETFs have enabled T Bailey to make a short-term play on the Brazilian market but the multi-manager says 80 per cent of the time it prefers an actively managed fund.

It says ETFs are seen as cheaper than normal tracker funds but this is often based on the total expense ratio while the brokerage costs to buy into and sell out of ETFs are often ignored.

T Bailey adds that annual charges can lead to trackers underperforming indices while the indices themselves can be concentrated in the biggest stocks, with high weightings to particular sectors.

The company accepts that a lot of active managers struggle to beat an index but says it has no trouble in finding managers that can.

Analyst Elliot Farley says: “Brokerage costs for ETFs are typically 0.2 per cent each way, so the cost of buying and selling is nearly 0.5 per cent on top of the total expense ratio. Some people treat them as very cheap but if, for example, I buy a normal tracker fund from Legal & General, I am dealing with the company direct.

“We would not make any friends among fund managers if we moved in and out of funds but 80 per cent of the time we will go for an active manager.”

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