Articles

ETFs – how to use them effectively

Scott Ebner of State Street Global Advisors discusses the role of ETFs in portfolio construction, as well as issues relating to accessing ETFs and fees.

Date: Aug 2011

Tags: ETFs, Portfolio construction, Asset allocation, Fees

  • The success of ETFs in most markets has come from the ability to use them for a wide range of investors for different objectives
  • A conclusion which the market can draw from the discussion over the risks and appropriateness of synthetic ETFs is the focus on making sure investors understand what they are buying
  • The main growth in the ETF market will continue to be in passive investing rather than via active ETFs
  • To minimise the overall costs with ETFs, it is important for investors to pay attention to the types of orders they can use and the choices they have in relation to market timing

Within the portfolio construction and asset allocation process, investors should focus on using ETFs as a tool, said Scott Ebner in an interview.

The success of ETFs in most markets has come from the ability to use them for a wide range of investors for different objectives, he explained. So it is about developing the right mix of ETFs alongside other investment products in a portfolio.

In line with this, whether clients take a long-term view of their engagement of ETFs depends on both the product and the client.

For example, Ebner said there are certain reasons why ETFs benefit from short-term investment strategies, so the combination of long- and short-term investors contribute to the overall benefits.

Synthetic ETFs

A conclusion which the market can draw from the discussion over the risks and appropriateness of synthetic ETFs is the focus on making sure investors understand what they are buying.

Ebner said when considering the issues in relation to investor risk and systemic risk, it is important to remember that ETFs are heavily regulated instruments in terms of local fund laws and exchange listing requirements.

It is important for the discussion about synthetic versus physical to focus on the differences between an investor’s risk appetite and systemic risk, he said, adding that he is confident synthetic ETFs are not creating systemic risks, but that the risk appetite for a given investor for certain types of risk related to certain investment techniques might be quite different.

The potential for actively-managed ETFs

Ebner said the use of passive ETFs linked to well-known benchmark indexes has been core to the growth of the overall market.

Yet there has been an evolution where more and more investors are actively managing a portfolio of passive investments.

Plus, in the US, there has been some success with ETFs that are actively managed, he added, either through fund of fund-type structures or by securities selection.

However, Ebner predicted that the main growth in the ETF market will continue to be in passive investing.

Fees with ETFs

According to Ebner, State Street is an independent asset manager, so it looks to the total fee and expense ratio on the products it offers.

Additional costs can be involved with ETFs, however, he added, such as those related to trading the product.

To minimise the overall costs, Ebner said it is important for investors to pay attention to the types of orders they can use and the choices they have in relation to market timing.

 

 
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