Dispelling ETF myths

Emma Dunkley talks to a panel of experts about the types of investors using ETFs and what can be done to further enhance the product in the wake of regulatory scrutiny

Emma Dunkley: How widely are institutions using ETFs and for what purposes?

Denis Panel: The main reason people use ETFs is to gain a diversified exposure to markets. ETFs are easy to trade, but they are also useful within a buy and hold strategy. Our clients are interested in a core and satellite approach and they employ ETFs for both. They are also used for hedging. If you analyse the last Edhec survey of European institutional investors, they want to use ETFs to increase their exposure to government and corporate bonds. They are also looking to access communities, real estate, alternatives and hedge funds; these trends will continue in the coming months and years.

Emma Dunkley: What type of institutional users do you see using ETFs the most?

Michael John Lytle: It varies quite a lot geographically. The countries buying the most ETFs at this point are France, Germany, Switzerland, the UK and those in the Nordic Area. Each of these regions has individual characteristics. The UK, for example, is institutionally driven with little interaction across retail; UK pension funds are late to the game in using ETFs. In Switzerland and France, pension funds are already very active. In France, corporates do not use ETFs that much; French asset managers on the other hand are very active.

The ETF industry owns as little as 3% of the overall fund management industry in Europe. So although it has grown very rapidly in the last few years, it still has huge growth potential. 

I think what people have discovered with ETFs is an ability to do asset allocation across a really broad spectrum. That is particularly interesting for those who have found it easy to buy equity exposure in the past but may have struggled with fixed income or commodities.

Emma Dunkley: Why do you think pension funds are using ETFs?

Christopher Aldous: The pension funds we speak to see ETFs as an incredibly versatile way to gain access to new and very liquid asset classes. If you want exposure to a basket of commodities or emerging market stocks, for example, it is expensive and difficult to get a merchant bank to organise that. An ETF is ready off the shelf, is very liquid and professionally managed; that is a great advantage.

Even in plainer assets such as corporate bonds, it is good to know there is a professional managing the portfolio even if it is just tracking an index. You might be able to manage that yourself, but why would you? ETFs have opened the door to more dynamic asset allocation within funds.