Is An ETF-Only Portfolio The Best For Investors?

November 03, 2014

 

The use of exchange traded funds in Europe has slowly increased since the UK’s Retail Distribution Review (RDR) came into force at the beginning of 2013, banning kickbacks and forcing fund managers and independent financial advisers into the spotlight.

The upshot of the regulation has been a movement towards ETFs, but they have a long way to go before they compete on the same scale in investor portfolios as in the U.S. They still come up against the challenge of the mighty fund tracker, the stalwart – if you will – of retail investment.

Nevertheless, ETFs are on the rise. By way of example, at the end of March the European ETF industry had 1,401 ETFs, with 4,968 listings and assets of $411 (€329) billion, according to data from research and consultancy firm ETFGI. This compares to January 2013, when the European ETF industry had 1,325 ETFs and assets of $331 billion.

We talk to Peter Sleep, senior portfolio manager at’ investment manager 7IM, who will be on the “Building an ETF Portfolio: The Future of Asset Management” panel at ETF.com’s virtual conference on 2nd December.

ETF.com: Why build a portfolio with ETFs?

Peter Sleep: We build model portfolios that combine ETFs and tracking funds and have a little over $640 (£400) million in our model portfolio program alone. We have been trading in ETFs since they were first launched in Europe. In the core markets we often find that that tracking funds and ETFs are similarly priced. However, we find that for customers with small amounts that there is a preference for tracking funds as this avoids dealing charges, which can add to costs.

ETF.com: Is an ETF-only portfolio the best kind investors can get?

PS: We do not think so as an ETF-only portfolio could be prohibitively expensive for small customers or regular savers in some circumstances. We like to combine the best of the world of ETFs and the world of index tracking funds in our passive model portfolios.

ETF.com: What are the benefits of a model portfolio?

PS: It is really about the preference of our clients. We offer many services including a model portfolio service. We find a lot of our customers like to see the individual components of their portfolio, but do not want a full discretionary service. Similarly, there are a lot of customers who are happy with a multi-asset or multi-manager fund.

ETF.com: What are the negatives with a model portfolio?

PS: A model portfolio can be slightly more complicated, from a tax point of view, compared to [a] multi-asset fund. This is especially the case if the customer is not investing though a SIPP or ISA (about 50% of our model portfolio customers do not invest via a tax wrapper). For instance, if 10 funds are bought and sold over the tax year, that may be 10 events for CGT purposes plus dividend and coupon flows to deal with on your tax return. All these flows are greatly simplified inside a fund for tax purposes.

ETF.com: Are investors attracted to the concept of packaged off-the-shelf products?

 

PS: We offer investors risk rated discretionary services, model portfolios and funds. We partner with highly reputable IFAs and work with them to ensure that the customer gets the best solution for them. It is really dependent upon the customer, in consultation with their trusted IFA, to find something that is suitable to them.

 

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