Using ETPs as part of asset allocation
Fiona Zerbst, FAnews Online Editor
It's taken a little time, but exchange-traded products (ETPs) are now catching on in South Africa. Particularly useful is the notion that we can now blend both active and passive instruments in portfolios, rather than taking an 'active vs. passive' view a
Stephen Cohen, Head of Investment Strategies and Insight EMEA, iShares by BlackRock EMEA, says that the recent focus in Europe on understanding what indexing can do for portfolios is one that we in South Africa should perhaps be applying our minds to. “Advisors have typically been more focused on the mutual fund industry but the shift towards fee-based advice in many countries means that advisors are now looking at a broader range of products to use in portfolios than before,” he says.
Exchange-traded products include exchange-traded funds (ETFs), exchange-traded vehicle commodities (ETCs) and exchange-traded notes (ETNs) – these products are similar to unit trusts because they invest in a basket of holdings and not a single share, but they differ by having to publish results once a day, indicating not only total net asset value but also all portfolio constituents and weightings. Unit trusts publish a daily net asset value only. In addition, unit trusts can only be purchased through the issuer of a unit trust, while ETF issuers can appoint one market maker.
A focus on suitability
The most popular exchange-traded product is undoubtedly the exchange-traded fund (ETF). Cohen says that although exchange-trade fund (ETF) penetration is growing from a low base in Europe, advisors have embraced these products in the US. Because regulatory changes have forced fee structures to open up – and this is the global trend – ETF usage has been growing, with some pressure from clients persuading advisors to investigate how best to use ETPs to mitigate against risk when constructing portfolios.
“This has really leveled the playing fields in terms of product,” says Cohen. “But more than ever the onus is on advisors to show they have a good, solid understanding of which products are out there and are best suited to particular clients. Suitability is a huge driver in the UK now - you have to prove to the regulator that you have identified the right product or products for your client, which also means you really have to engage with your client.”
Building a portfolio with a client means looking at the right options, the right cost and possibly tailored solutions that will suit clients. Hence the new emphasis on blending passive and active products when constructing a portfolio. “Some clients are more comfortable with standardised, low-cost products - when you build your client's portfolio, you need to have the right level of risk at the forefront of your mind,” says Cohen.
The use of ‘risk buckets’
In the US and UK, there is some emphasis on different ‘risk buckets’ that will assist advisors. “It may be that a client wants a 100% passive portfolio; alternatively, some prefer multi-manager. But it's the ‘something in between’ that we can expect to see growing,” Cohen predicts.
“The starting point for the conservation you as an advisor have with your client should be what the appropriate level of risk is,” says Cohen. “But the ongoing conversation about this is affected at times and the clients themselves change – are they still in the right risk bucket? Is their portfolio still suitable?”
Editor's thoughts:
When it comes to familiarising themselves with new products, advisors need to know that not all ETFs are the same – far from it. Choosing the right ETF is obviously fairly tricky and clients need to know why particular ETFs would be preferable to others. What is clear is that education is a key component of this process: both advisors and clients must be ofay with how active and passive products can be successfully blended in a portfolio. “Due diligence is obviously very important for advisors,” says Cohen. Comment below or email [email protected]
