Faster, lower cost, just as accurate – how ETF's are set to transform wealth management

John Hall

Asset ManagementAsset ManagementETFETF'sETFsInvestmentsliquidityPensionretail

There has been tremendous growth in ETF products over the last 15 years. With the increasing complexity and range of ETFs there has been increased take-up by investors of all kinds.

Headlines

 

  • ETFs do not differentiate on fee based on client type; a sovereign wealth fund will pay the same as a person on the street, unlike some traditional funds
  • ETFs/index funds are scalable, more assets should be able to bring costs down in the future

 

Key themes

 

There is some money going into ESG, but most money is still in large, liquid, vanilla funds. However, small and niche strategies are on the rise.


Running an ETF is not hugely taxing on the portfolio managers, perhaps this explains why it is cheaper than active management?

 

There was some discussion about the growth of sophisticated, retail and wholesale investors investing in ETFS.

 

Different markets have very different levels of engagement with EFTS, for example the US ETFs are set to dominate over mutual funds, whereas some European markets are much further behind such as Italy. This is partly because in Europe investors tend to be locked into an institution from a young age and not move between providers. The UK has a huge range of advice on offer, the advice is where money is made.


In fixed income there is a long way to go in terms of ETF adoption in Asia and Europe. Fixed income managers could use ETFs to express views rather than as they do now, choosing and index then using CDS or duration.

 

There are disruptors in the market which people seem to be getting overly excited about. If they are going to offer a very similar service, they will need to be regulated in the same way that many traditional financial institutions are.

 

How people receive advice will change. For example, some companies will track people’s behaviour online and give them a digital nudge to encourage them to question their investment decisions. Not all clients can be served by human interaction.

 

Conclusions

 

Everyone is a long-term investor, over the long-term costs add up. The cost of ETFs is one of their key selling points. When active managers are analysed, very few make money for the underlying clients when costs are removed.

 

Institutional investors and pension funds have many uses for ETFS, for example sometimes they use them when transitioning between fund managers. Pension funds can use them for liability matching. For retail investors ETS offer cheap access to asset classes.

 

Liquidity in both the primary and secondary is key to ETFs. Diversification is key to managing liquidity. Niche assets do end up with less liquidity.


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