Buying into less-common strategies

This article is part of
Investing in Passives - September 2016

Buying into less-common strategies

Passive products such as exchange-traded funds (ETFs) have traditionally focused on offering exposure to large-cap equity indices, such as the FTSE 100, and more recently to fixed income.

But a growing number of providers have launched passive funds that sit more comfortably in the alternatives investments category – a ‘catch-all’ term for any asset classes that are not traditional equities or fixed income.

Passive providers have been consistently gaining market share from active asset managers due to the appeal of these low-cost products as a way of accessing equities and fixed income, so it is no surprise they are now trying to corner the market in more niche areas. 

Howie Li, executive director of Canvas at ETF Securities, says: “Multi-asset portfolios have core allocations to equities and fixed income, and because of the challenges within those two asset classes, people are either looking for alternative sources of return or ways to diversify their portfolios.” 

Mr Li acknowledges that what “gets parked into alternatives” is a wide range of assets, with some providers including commodities in this category. 

Figures from ETFGI show by the end of July exchange-traded commodities (ETCs) and exchange-traded products (ETPs) had gathered a record level of net inflows of $10.1bn (£7.8bn). This was still some way behind the $22.4bn of year-to-date net inflows into fixed income ETFs, but ahead of equity ETFs, which recorded net outflows over the same period. 

Gold passive products account for a large proportion of these inflows, as macroeconomic uncertainties have seen investors allocate to the asset class. 

Lynn Hutchinson, assistant director at Charles Stanley, says: “Gold ETCs have been available for many years, but have attracted large investor assets this year.” 

Mr Li notes: “Gold traditionally is a safe haven and fixed income is the same, but correlation-wise they’re not always the same. It’s a good way to hedge against risk.” 

FundCalibre managing director Darius McDermott notes it is not just alternative asset classes like gold that can be accessed via passive strategies. Investors can get exposure to more niche areas of mainstream investments through ETFs, such as mortgage-backed securities, Chinese shares, megatrends like robotics, and oil. 

Ms Hutchinson adds: “A fairly new strategy of investment has been the launch of socially responsible ETFs. These rules-based ETFs track an index that is then screened based on a number of criteria. Many are screened for a company’s corporate governance, profits from tobacco, animal testing, armament and others.” 

UBS is one such provider with a range of sustainable ETFs that are built around the MSCI SRI indices. Head of ETF sales for the UK and Ireland Andrew Walsh notes this was still a very specialised area of investment a couple of years ago. 

“We’ve had assets grow from £250m across this suite of ETFs to about £650m in 15 months,” he says. “The key inflows into ETFs still go into the plain vanilla kind of things – the S&P 500, the FTSE 100 and the MSCI World [indices].”