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ETFs: The Right Product For The Job?

Written by Rebecca Hampson

 –  February 22, 2013

The use of exchange traded funds in portfolio management has been revving up since the financial crisis when investors wanted flexibility in investing—the ability to get their money in and out quickly.

It prompted investors globally to put a record $51.3 billion (€39 billion) into exchange traded products (which included ETFs and commodity-based products in December 2008), a figure that was only challenged in September last year.

Since 2008, assets under management in ETPs globally have risen 102 per cent from $1,483 billion (€1,116 billion) to $2,993 billion (€2,252 billion) as of mid-February, according to data from Deutsche Bank.

And demand for the products is set to continue rising.

A survey in January by State Street Global Advisers (SSgA) of 260 European corporate pension plans and 41 UK active fund managers showed that 47 percent of European corporate pension plans planned to increase their allocations to ETFs over the next five years, while 42 percent of the UK active fund managers would raise their use of ETFs in the future.

Of this, 46 percent of pension professionals thought that cost effectiveness was key, followed by 44 percent who chose liquidity. About 34 percent said ETFs provide better market access. The results were presented at the 20th anniversary of the launch of the SPDR S&P 500, the world’s largest ETF.

While the charge is now on to invest in ETFs, some investment portfolio managers have been quietly—and confidently—using them well before the boom and are already looking at other options.

One such firm is Seven Investment Management (7IM) which has been using ETFs since inception in 2001. The firm is headed by Justin Urquhart Stewart, who says that they originally started using passive index trackers (ETFs) because they wanted trading flexibility.

“However, we soon realised that when you looked at the range of passives you can build a whole portfolio with them. The passive vehicle has now become a key tool in the industry.”

Stewart and fellow founding partner, Chief Executive Officer Tom Sheridan, set up 7IM because they could not find an investment management company they would trust with their own pension money.

Today 7IM has over £4.5 billion (€5.2 billion) under management.

The firm has a range of funds you can invest in. They are designed and labelled clearly for a range of investors—from the risk averse to the adventurous.  For each type of investment, there is a dedicated team designed to work on the asset allocation of that particular portfolio.

Each portfolio, or fund, uses a range of products including index trackers, futures, ETFs and even buying the underlying.

This wide range of product exposure has now prompted them to question whether ETFs are the best product for the moment.

Peter Sleep, senior portfolio manager at 7IM, said: “Right now ETFs are more expensive than anything else and therefore they are not the first choice.”

He argues that index trackers are ideal for investors who want to hold with the same exposure, but at a cheaper cost. “You only lose the ability to trade intra-day, but if you are going to buy and hold you wouldn’t be doing this anyway,” says Sleep.


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