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Potential investors in exchange-traded funds

This article is part of
Guide to Exchange-Traded Funds

Frank Spiteri, executive director and head of retail distribution strategy for ETF Securities (UK), said exchange-traded product usage in Europe remains dominated by institutional investors compared with the US market.

Retail investors and their advisers hold only 15 per cent of ETP assets in continental Europe and 10 per cent in the UK, according to Mr Spiteri, while in the US these groups hold 50 per cent of all ETP assets.

However, he said the adoption of ETPs in the retail market looks set to increase in the post-Retail Distribution Review world, saying the variety of ETPs in existence “means they can be an integral part of almost any investment strategy”.

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ETFs are one of the simplest ways to invest in a particular market and can be suitable for many investors who want to achieve a broad market exposure, according to Nick Blake, head of retail at Vanguard.

Of course, not all ETFs are created equal and, just as for any investment, Mr Blake warns investors and their advisers still need to do their due diligence before taking a decision.

Ben Thompson, director of business development, listed products and ETF UK for Lyxor, says any investor that requires liquid, efficient, cost effective and transparent access to a broad range of markets across all major asset classes should consider ETFs.

“They can be purchased by any retail client with a stockbroker account, or adviser using a platform offering ETF trading capabilities. The eligibility of ETFs for an individual savings account or self-invested personal pension also means that they are suitable for investors concerned with tax efficiency.”

As most ETFs are passive investment trackers, Mr Thompson says they create a very simple risk/reward profile that can be easily understood,.

“With a total expense ratio (TER) of between 0.15 per cent and 0.85 per cent, ETFs provide an ideal low cost vehicle to access [to a wide range of] markets. With both income paying ETFs and growth ETFs available, [they] can be suitable for both growth and income strategies.”

Mr Thompson goes on to say the onscreen pricing and ability to trade in or out on a daily basis means that ETFs can be used by more “tactical” investors looking to take advantage of short term trends in harder to reach markets.

Simon Luhr, managing partner of FinEx ETF, says the fact ETFs are suitable for all types of investors who seek to replicate market performance or ‘beta’ is clear when you look at sales statistics.

“The first ETF was launched in 1993 and since then assets under management in ETFs and other exchange traded products globally reached $2,160bn (£1,390bn) at the end of July 2013, according to ETFGI, the independent research and consultancy firm.

“Year to that date, assets in ETFs/ETPs had increased significantly from $1,95bn (£1,250bn) at the end of 2012.”