Turning towards new safe harbours
Helena Conradie, CEO at Satrix
When considering whether ETFs will replace unit trusts as go to investment vehicles, the short answer is no.
The role of a financial adviser is to have knowledge of all available investment products and make sure that the most appropriate one for the client’s needs is recommended. This may variably be a unit trust or an Exchange Traded Fund (ETF); or anything else for that matter.
Fulfilling needs
Good products endure because they fulfil client’s needs on many levels. They meet these needs by helping clients to reach financial goals.
They are positioned and priced appropriately for clients. They are accessible to a particular client and are flexible enough to be used in a client’s portfolio whether for discretionary or compulsory means.
Exchange Traded Funds (ETF’s) are pooled investments which usually track a well-known index and are listed as shares which trade on a stock exchange. Unit trusts are pools of money collected from many clients which may or may not track an index. Unit trusts traditionally have been the domain of active portfolio managers, but a unit trust can also be passively managed and simply track an index.
Accessing leverage
When an adviser is building a client’s portfolio, they need to look at how they access the type of investment for a particular client’s needs.
Traditionally, advisers tended to use linked investment service providers (LISPs) because of preferable administration arrangements. They can manage a client’s discretionary and compulsory investments in one place with a wide choice of unit trust funds.
Tracking funds are useful tools to assist financial advisers in being able to use simple, transparent and low cost unit trusts to meet client’s needs using the LISPs they prefer to work with.
Although ETFs of this nature have been around for a very long time, it was difficult for advisers to use them in an overall portfolio because most LISPs couldn’t administer them; hence the proliferation of index tracking unit trusts.
ETF’s value
ETFs do have a place, especially if a client has a stock broking portfolio. ETFs are shares which trade on a stock exchange and therefore need to be held by a stock broker or similar trading platform.
This does not preclude them from use by financial advisers; it just means the access to the product is different. ETFs also give an adviser the advantage of being able to trade in and out of the market relatively quickly. So if an adviser has a Category 2 license and does in fact trade actively for clients, then ETFs would be their preferred vehicle of choice.
The other side
Index tracking unit trusts on the other hand price once a day - at the end of the day, which means that an investor can only buy or sell using the closing price of the fund. If the intention is to invest over the longer term, the frequency of pricing between index tracking unit trust and ETFs should not make a difference to investors.
As the ETF market becomes more sophisticated, many more types of ETFs are being launched which means an investor has increasing access to select parts of the market or factors. Unless an adviser is also a client’s portfolio manager, these are probably not the types of ETFs they would choose for a client.
The reason being is that as you slice and dice the marker ever finer and you are making very focused and targeted investment decisions which may or may not add value longer term. Most advisers prefer to use index trackers which track broad based market indices giving clients low cost and transparent access.
Unit trusts and ETFs have a very particular role to play in a portfolio. They are both able to deliver access to the markets. The one you choose for a client depends on the factors discussed above as they both serve as go-to choices for financial advisers as the need dictates.
