Rise of ETFs defended from doomsayers

Rise of ETFs defended from doomsayers

A host of advisers and fund buyers have jumped to the defence of exchange traded funds (ETFs) in light of criticism from fund giants Baillie Gifford and Old Mutual.

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. 

Significantly cheaper than traditional fund management, ETFs are an incredibly fast-growing part of the investment market. Global ETF assets have risen from $800bn (£607bn) 10 years ago to $4.2tn (£3.2tn) at the end of August, according to industry data provider ETFGI.

The rise of ETFs has faced criticism from Charles Plowden, joint managing partner at Baillie Gifford, and fellow active fund management giant Richard Buxton, chief executive of Old Mutual Global Investors.

Mr Plowden previously told FTAdviser the growth of the passive ETF market could sow the seeds of the next financial crisis. Mr Buxton has said they crowd out smaller, more dynamic businesses.

However a range of market watchers, advisers and managers have backed the growing use of ETFs, despite the criticism from Mr Buxton and Mr Plowden.

Peter Sleep, a fund manager at 7 Investment Management, said ETFs which are designed simply to replicate an index are not always an efficient use of capital, but the notion they are inherently more complex is “nonsense”.

He added that, as many platforms, including those used by retail investors, levy a dealing charge to sell ETFs, unlike with open-ended funds, they are more expensive to sell and therefore less likely to prompt a mass exodus in times of market strife than open-ended rivals.

Adam Laird, head of European ETF Strategy at Lyxor, said the uncertainty which gripped the market in the aftermath of the EU referendum result last year saw actively managed open-ended property funds suffer liquidity problems and investors struggle to get their capital out.

He said this implies open-ended funds are at least as prone to problems in times of market strife as are ETFs.

Mr Laird said while new and more exotic ETFs have come to market in recent years, the vast bulk of capital in the market is invested in the “plain, vanilla” products that track an index and so are simple to understand.

The more complex ETFs are generally created for, and owned by professional fund managers to perform a specific role in portfolios, and not 'dumb' investors who might panic at the first sign of strife, he said.

Advisers have become keen adopters of ETFs as a low cost way to access investment gains for clients in a world where how much they charge is under the regulatory spotlight.

Bruce Bulgin, partner in IFA firm Chadney Bulgin in Fleet, Hampshire, said he primarily uses passive investments for his clients for reasons of both performance and cost.

Market participants expect the exchange traded fund (ETF) market to grow markedly in the next three years, with most asset management companies expected to have an ETF offering within five years, according to a survey conducted by consultancy firm EY.