The ETF Explosion
Exchange-traded funds (ETFs) have exploded in popularity with investors over the last few years, both in Europe and across the globe, with assets now standing at well over US$1 trillion worldwide.
So what is driving the interest in this new approach to investing?
Exchange Traded Funds are designed to combine the benefits of trading in shares with the diversification offered by buying Investment Funds. ETFs are structured to replicate the return from an Index, Sector or other asset class and as such they cut out the need for professional management of the fund. Investors are attracted to the high degree of visibility of the underlying portfolio and the transparency of the charging structure. The ability to trade these throughout the day rather than having their price set once each day adds flexibility, and their use for investing in more obscure asset classes such as silver, gold or even coffee, normally reserved for institutional investors, also adds to their appeal.
One of the more tangible advantages of investing in ETFs as opposed to mutual funds is the much lower cost structure of the ETF. Because ETFs do not need to employ expensive fund managers and the associated research teams that are required for mutual funds, costs can be kept down to a minimum. This could be a good or bad thing depending on the success of the mutual fund manager that would otherwise have been chosen, but given that a significant proportion of the mutual funds listed in the UK underperform their stated benchmark, investing in an ETF should avoid the risk of underperformance, albeit at the expense of any outperformance. To coin a cliché, the ETF should do “exactly what it says on the tin”, and because of this the ETF market will only continue to grow in recognition.
It is important to point out that there are a number of different ways in which ETFs are structured and this in turn has a bearing on the risk profile of the fund. As with other investments it is therefore very important to fully understand the investment and seek professional advice where appropriate.
Hargreave Hale already actively uses ETFs with their Sector Allocation Portfolio which invests exclusively in these securities for their clients.