Are ETFs Really The Best Product? Part 1

June 18, 2014

 

In the first of this two part series ETF.com asks three industry experts about their opinion of ETFs and whether they really are the best products available to investors.

 

The exchange traded fund market is growing at a fast pace, with records being broken at a rapid pace.

In Europe the ETF and exchange traded product industry, which is made up of 2,032 products with 6,169 listings from 49 providers over 25 exchanges, gathered $6.05 (£3.05) billion in net new assets in May alone, which pushed overall assets in the region to a record high of $459 billion, according to data from ETFGI.

Records were also broken globally with the US hitting assets of $1.8 trillion, Japan $86.7 billion, Canada $63.2 billion and the Middle East and Africa $41.69 billion, which all highlight an increasingly successful industry.

However, while these numbers are something to behold, advisers across the European region are still slow to take up ETFs. So, are ETFs always the right product for the job?

Rebecca Hampson, European editor at ETF.com talks to three investment experts to get their views on ETFs.

Adam Laird is passive investment manager at Hargreaves Lansdown

Peter Sleep is senior portfolio manager at Seven Investment Management (7IM)

Stephen Walters is managing director of Dexterity


ETF.com: How do ETFs compare to index funds?

Adam Laird:  ETFs and index tracking funds have a similar purpose, but investors see their different features in different ways. Tracker funds tend to be core products, tracking mainstream indices at low cost – investors can buy once or twice a day, often with a delay, which makes them ideal for long term investors. ETFs track a much wider variety of indices and can be traded throughout the day. They are useful for investors who want to take more tactical positions, perhaps investing in more niche areas. ETFs are also related to Exchange Traded Commodities, which give access to the price of metals, energy or agricultural produce.

Peter Sleep: I think if you look at the outcome, ETFs and index funds are pretty much the same thing.  Otherwise there are two differences. Firstly, you can trade ETFs at any point in the day, whereas index trackers are traded once a day, and secondly with ETFs there is far more choice.

Stephen Walters: They are suitable for retail investors in UK, there are a few dozen index funds in the UK, which is good, but now there are almost 500 long-only ETFs, which is better.

Those 500 ETFs cover a range of focus far, far wider than the few dozen mutual index funds cover.

For people wanting safety in size, two of the index funds have over £1 billion, this compares to ETFs, whereby 15 have over £1billion. And instead of being only tracking UK 100 indices, those huge ETF range from tracking UK to World, via Europe, USA, Japan, Emerging Markets and Gold.

 

ETF.com: How important is cost to investors?

AL: Cost is vital, but it’s not the only thing that matters. It’s equally important to look at what the product aims to do and how to do it. However it’s imperative to factor charges into that decision making process. With £10,000 invested over a decade, reducing fund charges from 0.5percent to 0.1percent can save over £350.

PS: I think cost is an important factor and the continuing price cuts confirm this.  There are some technical factors, but there is little else to distinguish between funds and ETFs otherwise for the majority of investors.

SW: For sure, cost is an important factor; but for the ETF investors I support, cost hasn’t yet been the highest priority, and I doubt it ever will be. The first priority is to agree an investment focus likely to make money for them, within a diversified but relevant portfolio. Also, lest together we misjudge the upside potential, we look at the downside risk of fund candidates, and filter out any with volatility wilder than we need accept.

 

 

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