Are ETFs Really The Best Product? Part 2

June 19, 2014

In the second 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.

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 important is the intraday trading function of an ETF?

AL: It’s important, but not essential. Not all ETF investors are short term traders. For those that do want to be tactical though, the ability to use limit orders and time their trading is a real benefit.

PS: I do not find the intraday trading very useful as I cannot time markets. I do find the choice of being able to sell on the secondary market, or being able to redeem at NAV useful though, particularly when I have large blocks of an ETF to sell.

SW: Intra-day trading wouldn’t exist if it weren’t valuable to a section of the investment community. However, for the section that I support (which is retail investors learning to self-manage their own portfolio), intra-day trading is not yet an important factor in their choice of ETFs. Yes, they know prices do fluctuate from moment to moment; but their trades are infrequent, and relatively small; also they trust the ‘best execution’ process to find for them a competitively-priced transaction.

 

ETF.com: How important is it to have access to exotic underlyings?

AL: This is difficult to answer – the most popular products are always straightforward, vanilla strategies. Exotic asset classes and indices are a big pull for the ETF industry, but many are aimed at and perhaps only suitable for institutional investors. If an exotic ETF isn’t available, investors will probably still find a way to invest but investors generally want the choice.

PS: It is always nice to have extra tools in my toolbox, but generally I stick to the core markets.

SW: Please may we first agree what counts as exotic? For you and I, the termsprobably means some kind of fund that experienced day-traders and institutional investors might want, to fill a gap, or catch an opportunity. I doubt any client of mine will ever come close to buying a Risk On ETF or a long-short fund. To them though, Nuclear power, Shipping and Commodities Baskets might be ‘exotic’ options. I bid that a healthy ETP industry needs companies willing to experiment with exotic indices; and a few of them might become commonplace.

 

ETF.com: Do investors care about securities lending?

AL: Awareness is growing. Not all investors care about securities lending, but it’s becoming one of the key questions that clients ask when assessing an ETF. The risk of loss from lending is generally low, but there are investors who simply do not feel the risk is justified. When groups decide to cease lending, it’s often well received.

PS: Investors are more concerned about physical or swap than by securities lending in my experience, although my experience may not be typical.  I note a number of ETF providers have reduced or stopped their stock lending activities, which does suggest more concern than I have encountered.

SW: None of mine have yet shown any concern. I have explained to them that it happens; how and why; what the merit (profit) and defect (CPR) are from their point of view. Of course they expect me to give them the cue for concern, and because securities lending is a topic that has yet to to concern me, they aren’t agitated by it.

 

ETF.com: Do you think securities lending is made clear enough by providers?

AL: Normally the information is there if you know where to look for it, but some make it more visible than others. It is important for providers to remember- if investors can’t find the information, they are much more likely to go somewhere else than ring up to find the answers.

PS: I think it is clear enough if you care to look.  I have found that if you still not happy you can generally ask and find whatever you are missing.  Active funds also lend their stock, but I have not found anything like the same level of disclosure from an active fund house.

SW: Yes. A fund with a tracking difference smaller than the TER (and especially a positive TD) is evidently lending securities. In my judgment, retail investors need know no more detail than that.

 

 

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