In terms of liquidity, ETFs are traded on stock exchanges, so they can be bought and sold any time the exchange is open, even if the underlying market is closed. For example, a UK investor can buy a Japanese equity ETF during UK trading hours when the Japanese market is closed.
ETFs can also provide diversification. An ETF that tracks an index might contain hundreds or thousands of securities – more than many actively managed funds and far more than a typical portfolio of individual securities. Broad diversification can help offset the risks associated with any one security or market segment.
ETFs also provide full transparency on their underlying investments. As a result, investors and advisers are kept informed about their constituents, performance versus the benchmark, and costs on a regular basis.
ETFs can be used to implement a variety of short and long-term investment strategies.
At a strategic level, they can help clients construct their core portfolio allocation, as they offer fast, precise and cost-effective access to a broad variety of assets and sub-asset classes.
Active and passive combinations, combining index ETFs and low-cost actively managed funds for diversification and the opportunity for outperformance, are possible, too.
There are a number of other ways advisers can make the most of ETFs. Their flexibility can help investors with liquidity and transition management. They also allow for rebalancing and tactical adjustments, among other uses.
With margins likely to come under increasing pressure over the coming years, the role of ETFs in constructing investors’ portfolios will only become more important.
Given their versatility and their benefits for clients, we believe they will continue to gain traction within the adviser community, not only as flexible building blocks that allow them to deliver high-quality portfolios to their clients, but also with the low costs that can help maintain their margins.
Neil Cowell is head of UK intermediary distribution at Vanguard