Booming trade shows ETPs ‘not just for short term’

But ETPs are not the only option open to retail investors – there are also traditional mutual fund trackers, futures, derivatives, and of course the new range of strategies sometimes called smart beta or strategic beta.

The latest BlackRock ETP Landscape report notes there were roughly 5,266 ETPs globally in August, and this number is set to grow – iShares recently launched a single-country French equity ETF, while Source expanded its range of volatility products and Boost ETP unveiled three short fixed income ETPs.

So how do you decide where to put your passive money? Mark Johnson, head of UK sales at iShares, suggests the key consideration is the choice of benchmark. “Rather than working backwards from the vehicle it is really about identifying what benchmark you want exposure to and why, as there can be significant differences. The second thing is the way you’re going to access it – the timing, the holding period and the cost sensitivities.”

Tim Huver, product manager at Vanguard, says when comparing index trackers with ETFs the obvious comparison is the stated or headline total expense ratio, which is usually lower on the ETF. But he adds: “The investor needs to take into account the total cost of ownership, including trading costs, when comparing strategies.”

He points out trading costs may mean ETFs are not the best home if investors pay regular premiums into the vehicle. But he says ETFs are not just for short-term and tactical investments – “We are seeing increased interest in ETFs as buy-and-hold products”.

Trading costs are paid when you buy or sell the ETF, so spreading that cost out over a longer period makes it more cost-efficient.

Viktor Nossek, head of research at Boost ETP, says certain niche vehicles such as short and leveraged ETPs have extra factors to consider, including the effect of gearing and how it can amplify returns, but can also amplify the decay of the return in volatile markets.

“You should hold these for a short-term investment horizon, for a few days, a week maybe no longer. It is not suited to every investor – these products cater for sophisticated investors.”

Nyree Stewart is features editor at Investment Adviser

Key facts

• The RDR reforms and the changing structure of the adviser market are placing more focus on costs, with implications for active managers

• Increased availability of indexing products in terms of accessible markets and techniques available is increasing pressure on traditional active managers

• Equity market conditions have led some retail investors to be wary of risk and place more focus on cost, which is potentially beneficial to passively managed strategies

Expert view: smart beta

Ben Willis, head of research and investment manager at Whitechurch Securities, says smart beta products are increasingly being launched. “This has been driven by wanting more than an index-tracking fund, something more focused, specialised and/or niche but without having to pay as much for it as an actively managed fund would charge. I think it comes down to layers of complexity and to a certain degree, product risk.”