ETFs - Spring 2017  

How ETFs build diversification into portfolios


There are a lot of “broadly diversified” portfolios in the investment industry that invest in a “simple mix” of equities and bonds, Joe Parkin, head of UK wealth and retail sales at iShares, has suggested.

In an interview with FTAdviser about building diversification into a portfolio, Mr Parkin said: “We believe that taking the entire universe of investments, assets and asset classes and investing across them to build a truly diversified portfolio is a great way to look at building a really good portfolio.”

“The other thing we think is trackers and ETFs are a perfect vehicle for building diversification into a portfolio,” he added.

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“When you think about what they are, they are simple, easy to use and cheap vehicles that, with one trade, give you a range of assets and asset classes in one simple instrument.”

ETFs, or exchange-traded funds, have been gathering inflows for the past few years. 

Consultancy ETFGI reported assets invested in ETFs/ETPs listed globally reached a new record high of $3.5tn (£2.85tn) at the end of 2016, surpassing the prior record of $3.4tn (£2.76tn) set at the end of November 2016.

Mr Parkin said when constructing portfolios it is important to ensure it is in line with clients’ expectations and to maximise returns within the client’s risk parameters.

“The third thing is keep a really keen eye on transaction costs”, he added, noting that means not making multiple changes to a portfolio.

“This is where we think ETFs are such an important vehicle in order to play these different things,” Mr Parkin said.

“If you think about the MSCI World [index] for example, it is a great vehicle to diversify your portfolio – it has got 1,600 global large and mid-caps in it, across 23 countries, [and] 11 different sectors in one trade.

“We also saw it from a portfolio construction perspective in and around Brexit. A lot of clients took money out of European or UK equities and bought dollar bonds.

"A very simple transaction when you do it in an ETF but underlying that is a great diversified asset class base,” he explained.

For more on ETFs, read FTAdviser's Guide to ETFs by clicking here and bank 60 minutes of structured CPD.