Next up, adjusting style bias
“For investors that want to adjust a style bias within a portfolio the development of smart beta ETFs that track a value or growth index provide a quick way to do this,” Mr Greenhough points out.
He gives as a example a bias to growth funds led by the performance in recent years of funds like Fundsmith, and Lindsell Train UK Equity, where a value based ETF can help balance this bias out.
Using an ETF to obtain style performance without active manager fees is fairly self explanatory, but the example Mr Greenhough gives is if a value fund manager underperforms a rules based value ETF, “this would suggest that the actual stock selection the active manager is doing detracts from performance”.
Finally, clients with taxable portfolios that are constrained by capital gains can use ETFs to form the core of their portfolios.
Mr Greenhough says: “They receive the performance of the market and don’t have to worry about fund manager changes possibly creating a requirement to sell. By receiving market performance at a low cost, the ETF is an instrument they can buy and hold for a long time.”
ETFs also offer investors transparency in holdings and cost.
“Investors are able to understand portfolio risk in granular detail at all times, and the transparent methodologies for rules driven approaches means that investors can understand how their portfolio will react to market changes,” Mr McManus says.
“In terms of the costs of trading - what we really like about ETFs is that we can understand the exact price at which we will purchase or sell the security, before the transaction takes place (unlike mutual funds where the transaction typically takes place once a day at a set point).
“And in some asset classes, the secondary market that exists in the ETFs means investors are able to quickly and efficiently gain access to assets that are expensive to trade individually - the cost of purchasing the ETF (the bid-ask spread) in the secondary market can often be lower than purchasing all of the individual securities themselves.”
With the demand for passive products on an upward trajectory and predictions by iShares that ETF assets will reach $1trn in Europe by 2019 are there any barriers to using ETFs in portfolio construction?
Easily accessible
Joe Parkin, head of UK wealth and retail sales at iShares, reckons that for ETFs to reach their full growth potential investors need to be able to access and easily trade them.
