Why I recommend ETFs…

A quartet of industry experts tell Joanna Faith why they recommend exchange traded funds to their clients and which ones they like.

Andrew Reeves, director, The Investment Coach

I use exchange traded funds (ETFs) as they have low total cost of ownership, do a specific job in a client’s portfolio and I find it easy to demonstrate the component costs of a clients portfolio.

Often I access ETFs via Evercore Pan-Asset, the discretionary fund managers. I like the tactical asset allocation overlay they offer for 0.25% including VAT. They also undertake the due diligence to ensure that my clients are only invested in “vanilla” ETFs and none of the “exotic” ETFs with undesirable characteristics like shorting and under-collateralisation. I have long thought that “exotic” ETFs should be given a different name to distinguish them.

I particularly like ETFs in client portfolios as you can see a breakdown of how the constituent ETFs are performing. A breakdown of a fund of funds, for example, does not always lead to the same level of transparency – as the performance of the component parts is often aggregated.

Ben Smaje, managing director, Kennedy Black Wealth Management

We favour a passive investment strategy because we believe fund managers do not typically outperform on a long-term, consistent basis and are therefore not worth paying for. In our view, a carefully crafted asset allocation process adds more value to the client than trying to pick the next hot fund manager.

Exchange traded funds (ETFs) are a cheap and transparent way of building a passive investment portfolio. However, we do have some concerns about ETFs (particularly synthetic ETFs) for a variety of reasons (largely around counterparty risks and the additional level of complexity involved). We do still use ETFs, but only in specific circumstances where there is no suitable mutual fund alternative. In that respect, ETFs allow us to add very specific exposures that are not readily available elsewhere, thereby ensuring a well-balanced and diversified portfolio overall.

In terms of specific examples, we use the iShares Markit iBoxx £ Corporate Bond ex-Financials ETF to counterbalance another mutual fund that we use in the fixed income space that already has some exposure to financial bonds and the Lyxor CRB Commodities ETF, which gives access to a well-recognised and broad-based commodities index (covering energy, agriculture and metals).

Jaskarn Pawar, director, Investor Profile

Exchange traded funds (ETFs) allow you to introduce low-cost funds into a client’s portfolio in areas that traditional index trackers might not provide.

I tend to use physical ETFs. I would consider synthetic a higher risk option due to their nature, although I do see the lower cost benefits they could provide. I particularly use ETFs in areas such as fixed interest and commodities.

Right now, for example, the iShares FTSE Gilts 0-5, iShares Markit iBOXX £ Corporate Bond 1-5, iShares Barclays Capital Euro Corporate Bond and the iShares Barclays Capital $Treasury Bond 1-3 are useful.

These ETFs can be a cheap way of investing in short dated fixed interest funds at a time when there is uncertainty surrounding longer dated bonds.

I also like the Lyxor Commodities ETF. It is a good mix of the usual commodities and is actually quite rare as most ETFs focus on a single commodity.

Andrew Swallow, chartered financial planner, Swallow Financial Planning

We use exchange traded funds (ETFs) as low-cost passive investments. If we can get an FSCS-registered mutual fund for the same price then we would tend to use that instead but there are many instances where ETFs provide a particular index or mix of funds which we cannot get elsewhere.

We prefer the ETF to hold the stock but again we use synthetic tracking where we have to so, for instance, a client recently wanted three times gearing to short the euro against the dollar and we got it for him using a synthetic geared ETF. Unusual but the client got what they wanted (and is now 6% down!).

The chances of an ETF failing are very small indeed, however, if there are twoidentical indices offering the same charges then we would opt for (in order of preference): an FSCS collective; a full replication ETF; a sampled replication physical ETF; a multi counterparty swap based ETF; a single counterparty based ETF with the biggest most highly rated counterparty; a single based counterparty.