Passive funds with additional flexibility

This article is part of
Passive Investing – June 2016

Passive funds with additional flexibility

Passive investing has increased in popularity in recent months, with the Investment Association highlighting net retail inflows into tracker funds of £454m in April 2016.

But while tracker funds are gaining favour among UK retail investors, exchange-traded funds and products (ETFs/ETPs) appear to be the preferred form of passive investing for many, with global-listed ETP assets of more than $3trn (£2.1trn), data from both ETFGI and BlackRock’s monthly ETP Landscape report shows.

Drivers behind the rise in passive investment could include an increasing focus on costs as well as market and macroeconomic uncertainty, with issues such as the upcoming EU referendum and global monetary policy pushing investors towards more broad exposure to a sector, region or asset class.

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Investors choosing a passive route then have to make the choice between a tracker or mutual indexing fund or an ETF, with both products offering many similarities and only a few differences.

Bryon Lake, head of Invesco PowerShares for Emea, points out there has been an undeniable shift towards passives for many decades, but notes the two types of vehicle are not dependent on each other. “Passive investing is an investment approach and ETFs and/or trackers are a wrapper conversation,” he says.

“You could easily get any of the investment content in either a tracker or an ETF. [Investors need to] think about the types of exposure they’re trying to get to the market then talk about the right vehicle to get that exposure.”

The first ETF was launched in the US in 1993, with the products moving to Europe roughly a decade later. Mr Lake notes the idea was borne out of efficiency – the concept of buying one share in an ETF but having exposure to all the underlying stocks in an index.

In terms of gaining exposure to a particular index or sector, he says there are benefits to both ETFs and tracker funds. For example, they both have access to the underlying shares, they tend to be extremely transparent and have a “reasonable price point”. In addition, tracker funds fit nicely into the existing infrastructure of UK investment platforms.

“The ETF has the same benefits – transparent, fully invested, low cost – but you also have a couple of additional pieces to that. You can deal intraday in an ETF, so you have that intraday liquidity point, which brings another level of flexibility and liquidity.”

ETFs or tracker funds: Expert view

Simon Klein, head of exchange-traded product sales for Europe and Asia at Deutsche Asset Management, looks at cost implications:

“ETFs and tracker funds both fundamentally do the same thing, in that they are funds that track an index. Traditionally, tracker funds have been lower cost than ETFs, and many tracker products have minimum investment amounts that make them not so suitable for retail investors.

“But as competition in the ETF market has become so intense in recent years, fee compression on ETFs has meant that in many cases this may be the most cost-effective way to access the index exposure. ETFs can also provide an additional layer of liquidity, which is helpful, especially when the underlying market may be less than liquid.

“Investors that have a choice of either a tracker fund or an ETF on the same benchmark might look at a number of things. A lot of investors like to know that their provider is a large, established investment house. They’ll also look to get a sense of what the total cost of ownership in each case is; that is, the overall cost of buying, holding and then exiting their position. This takes into account tracking difference and any buying and selling costs.”