ETP interest appears to be on the rise

Today 27 out of 29 platforms in the UK allow access to ETFs with Cofunds and Skandia being the key exceptions.

Skandia’s view on the matter is that the highest demand is for fund-based solutions via platforms and that is what it has been focusing on.

Notably, according to data from research hub the Platforum, while funds accounted for some 90 per cent of platform sales in the final three months of 2013, ETFs notched up a mere 1 per cent. For its part Cofunds has stated that, as a result of an increasing number of clients wanting to access some less mainstream investments, ETFs are potentially in the planning mix for future development but the group has no timescales to confirm as yet.

ETFs have not, at least as of yet, reached the precipice of falling into the mainstream. But iShares head of UK, Mark Johnson believes the asset class is at an “exciting inflection point”, noting that in the US the advent of fee-based financial advice in the US some 10 years ago, really kickstarted an abundance of ETF usage.

He says: “We are now 12 months on post-RDR and we have seen a significant pick-up. My impression is that advisers like the low-cost access to markets that ETFs offer, particularly when they are looking to blend active with passive management.”

ETF Securities’ head of UK & Ireland, Neil Jamieson, also asserts that following the RDR there is growing interest from the adviser community, who wish to use ETFs as part of strategic and tactical asset allocation.

He says: “Education about the structures and uses of ETPs is therefore an important activity for providers. Over time, we would expect more and more advisers to use ETPs in portfolio construction.”

Adam Laird, head of passive at the UK’s biggest fund supermarket Hargreaves Landown says he has witnessed “growing interest” in ETF use among individuals. From a planning point of view, he says that it is becoming increasingly common for clients to use passive investments like ETFs along with traditional active funds.

He adds: “People often use ETFs for areas where it is hard to find good fund managers such as US Equity. There has been a perception that ETFs are only for sophisticated investors who day trade but this is not true.”

But City Asset Management research director James Calder admits while he has used ETFs in the past he thought he would be using them a lot more than he has. He says: “We did use them to access commodities, especially gold and we may look perhaps at a US version, given that active managers tend to struggle in beating the market there.

“We are not against ETFs but as we stand right now, while we do at times use trackers, we are more prepared to pay for decent active management.”

Informed Choice managing director Martin Bamford takes a similar stance, noting that although he has previously recommended ETFs he has since moved to index trackers. He says: “Tracker funds tend to be a better option for retail investors than ETFs, particularly when considering the more esoteric ETFs, which track niche indices, have inverse returns or gearing.”

Two challenges these passive vehicles face is their complexity, particularly ‘synthetic’ ETFs, as well as the fact they do not benefit from the protection of the Financial Services Compensation Scheme (FSCS).

Charges may also not be as cheap as first seems for smaller investors or those who are rebalancing in their portfolio because stockbroker’s costs need to be paid when buying or selling.

Patrick Connolly, certified financial planner at Chase de Vere, says: “ETFs can be difficult to understand and expose investors to an additional level of counterparty risk. We tend to use passive funds for exposure to more efficient stock markets such as the FTSE 100 and US large cap stocks.

“While there are cost, access and liquidity benefits to ETFs, there are also the potential dangers of investors selecting complex products, investing in high risk areas with little protection and maybe paying more in charges than they think.”

Philip Scott is a freelance journalist

Adviser views

Use of ETFs

Exchange traded funds may be a growing market, but what place do they have in a portfolio? We asked some advisers to give us their views.

Susan Hill, chartered financial planner at Susan Hill Financial Planning, says:

“Yes I use ETFs, they form part of my passive portfolio. Most index funds come either as unit trusts, Oeics or ETFs. I mainly use Vanguard although also iShares.”

Carl Melvin, certified and chartered financial planner at Affluent Financial Planning, says:

“I don’t use ETFs very often as I mostly use vanilla tracker funds. I don’t use them due to costs/brokerage, especially for regular purchases. But if I did I would always look to access them via a platform, as I suspect not many advisers will use direct to provider.”

Joss Harwood, co-director of Eldon Financial Planning, says:

“We currently use index tracking unit trusts in preference to ETFs. Our reasons are broadly for clarity of cost and potential volatility. Our clients don’t need the facility to trade during the day. When we can access Vanguard’s UK Equity index tracker for a known 0.15 per cent per year with barely any tracking error, there is a strong argument for taking that certainty for our type of client.”

David Penny, managing director of Invest Southwest, says:

“We do include ETFs in our investment proposition but only for sophisticated investors with in excess of £500,000 to invest in a relevant vehicle. As our client base is predominantly not high net worth we have as yet not encountered a client who meets both criteria and for whom ETFs or ETCs are appropriate. Should this be the case then our view is that synthetic ETFs are unlikely to be suitable for the vast majority of retail investors given their complex structure and additional counterparty risk involved. We do perceive that when this marketplace becomes more mature it may be appropriate to lower the threshold for advice in this area both in terms of monetary amounts and the experience of the investor.”