Your IndustryApr 13 2015

Exchange-Traded Funds - April 2015

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Approx.50min

    Exchange-Traded Funds - April 2015

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      Introduction

      By Ellie Duncan
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      Now, with the launch of the first UK-domiciled ETF, it would seem ETFs have finally made it into the mainstream.

      While so-called actively managed funds come under pressure to prove how active they really are by publishing details of their active share, ETF providers have been able to reduce their charges even more on what are already seen as cost-efficient products.

      The ETF market started out in the US, which means the market in Europe has some catching up to do. Howie Li, co-head of Canvas, an ETF-based solution at ETF Securities, suggests the US is around five years ahead of Europe, “but Europe is quickly catching up”.

      “Even in the last two or three years we have come to realise that across different client segments, people are starting to understand what ETFs are used for and their benefits as an investment tool,” he says.

      The ‘EY Global ETF Survey: 2015 and Beyond’ describes the US ETF market as “distinguished not only by its size but also by its liquidity and its retail investor base”.

      But while the growth of the US market is slowing, Europe’s ETF market is forecast to continue growing at more than 20 per cent. The survey cites the potential for annual asset growth of between 20 and 25 per cent this year in Europe, compared with 10-15 per cent in the US.

      “European ETFs still only account for 3.2 per cent of the European mutual fund industry, so there is lots of space for more growth,” says John Adu, head of UK exchange-traded product distribution at Deutsche Asset & Wealth Management. “The US ETF market is more mature and is closer to 15 per cent of mutual fund assets.

      “The trend in Europe is that more retail investors are using ETFs, and for a variety of purposes, both long-term and short-term investing.

      “In the UK, the Netherlands and Sweden, the Retail Distribution Review and the various versions of it on the continent have proved to be a catalyst for ETF adoption, given compressed total expense ratios and on-exchange spreads across Europe.”

      Mr Li has seen investment advisers promote these products for other reasons, such as being “very transparent vehicles” that allow clients to “liquidate a portfolio at any time”, adding: “Speaking to investment advisers, one of the key concerns for their clients is how they protect against shocks such as those in the last financial crisis.

      “The ability to essentially exit your position via the stock exchange at any point during the day is highly attractive, and you get real-time pricing.”

      It is not simply that ETFs are highly transparent and cost-efficient that has seen UK and European investors invest more in the ETF market, but that these vehicles offer exposure to a range of asset classes. In this era of multi-asset investing, ETFs could provide another way for investors to create a truly diversified portfolio.

      “Some investors have the false impression that ETFs are an asset class, when in fact they are simply a very efficient way to take positions on different asset classes and types of market exposure,” says Mr Adu.

      “Given the benefits of ETFs – the low cost, high levels of transparency, liquidity and ease of trading – investors should be considering ETFs as a standard instrument for day-to-day investment needs.”

      Ellie Duncan is deputy features editor at Investment Adviser

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