Stefan Kuhn
Head of ETF & Index Distribution, Europe, Fidelity International

From your conversations with clients how do you see ETFs being used by investors?

On one hand you have those more cost-conscious parts of a portfolio, where clients just want to have access to the market at a lower price point for the level of risk. But on the other, there’s also a lot of demand from investors for unconstrained, highly-active solutions; here you need to be able to take a lot of risk because that’s what these strategies will give you. 

So I see clients ‘barbelling’ - allocating between highly-active solutions at one end of the spectrum and index-aware ones at the other. That’s driving demand for ETFs in general, including for active ETFs. 

If you’re an investor that likes when an asset manager can provide research capabilities, can be nimble, and is to transact around the index and not have to wait until the index rebalances, then you’re probably not interested in a passive ETF. Instead, an active ETF combines the market access and the lower price point of an ETF, while still providing what you want from an active asset manager. 

It's important to note though that the overall tax benefit of the ETF versus the mutual fund doesn't exist in Europe in the same way it does in the US. If I have the choice to buy a solution in an ETF wrapper or in a mutual fund, it's not clear cut to go for the ETF. For the foreseeable future, active ETFs in Europe will remain index aware, because they're being used by institutional investors and by retail investors as an access vehicle to a predefined market.

This does not mean that the same type of active ETFs won’t develop in Europe as they have in the US. That will come at some point, but there needs to be a different angle as to why it’s beneficial for the client to buy an active mutual fund in the ETF wrapper. That benefit could be transparency perhaps, or intraday trading. But with transparency comes the caveat that an active manager has to show their positions on a daily basis - that’s not always something they want to do, while an investor may not want it because they will want their asset manager to be free in their decision making and not advertise it to the street on a daily basis. 

How do ETFs affect the experience of end-investors?

I sometimes talk about the ‘insourcing of retirement’. People used to outsource their retirement saving to a pension plan, to their company retirement, or perhaps to their insurance wrapper, but now they’re preferring to manage the process themselves and have started saving money at an earlier age in an automated savings plan rather than a bank. An ETF is a great wrapper for that because once it’s been selected, it can give you what you need for the next 10, 20, or even 30 years. 

Andrew Craswell
Principal, European Head of Client Relationship Management, Brown Brothers Harriman

How has the growth of the ETF market changed the game for investors?

Investors now have a choice that perhaps they didn’t have before. The majority of active strategies were previously in a mutual fund wrapper, but now there’s the option to use the exchange traded version. On top of this decision, research-enhanced index products can give investors an alternative to core index type products for those looking for a small amount of alpha on top of their index returns. 

A big benefit of the exchange traded feature is being able to see what you’re paying up front, rather than waiting until end of day. But it gets more complicated when you start thinking about the total cost of ownership, because as well as having that instant access to the product on the exchange, you also need to start thinking about things like brokerage fees, trading spreads, the cost of custody, and things like that.

Whether or not you go through the exchange-listed version or through mutual fund distribution is going to be slightly different for every investor. Looking at the total cost of ownership really is important, and ETF issuers and asset managers are spending a lot of time educating people about that.

There will be situations where ETFs may not be the best way to deploy an investment strategy - very niche areas, such as small-caps for example, aren’t necessarily going to work in an ETF wrapper.

What’s driving the growth of ETFs in Europe?

In the European ETF market, most products are UCITS-compliant, and the beauty of this is it allows them to go further afield in terms of distribution. We're seeing ETF flows into European-domiciled products coming from markets like Asia and Latin America where, because of tax efficiencies for those investors, they may prefer to own UCITS products rather than US-domiciled ETFs.  

Similarly, investors in Europe that have bought US-domiciled ETFs for many years may start to show a preference for UCITS ETF products now that there's a critical mass of them, and now these products are starting to come into the European market again.

There are also other macro drivers that are acting as tailwinds for ETFs, aside from the tax treatment for certain investors. Technology is a big theme, especially on the retail end of the investor spectrum. A lot of traditional platforms that have distributed mutual funds for many years and have huge assets are now advancing their technology to be able to support ETFs as well. There's also a move towards automated financial advice, with ETFs often being the wrapper of choice for those automated platforms.

Caroline Shaw
Portfolio Manager, Fidelity International Multi Asset team

As a portfolio manager, how do you use ETFs?

I think there's nuances depending on what you're trying to build. When you're doing something tactical, the ability to trade intraday is really important and being able to access the prices of exactly what you want at any point in the in the day is key. For a buy-and-hold investment, maybe that matters a little less.

If you're picking an ETF and holding it for the long term - for example over 10 years - you’re looking for a bit of alpha for the tracking error over that period. So instead of going into an S&P 500 tracker, you may opt for something that's research-enhanced, or a strategy that can just deliver a 1 per cent outperformance, i.e. alpha,  over the broader market. For that objective you're probably looking at global ETFs, at global equity markets, or perhaps at distributing regionally.

Or maybe you want exposure to a certain theme. We see quite a lot of thematic, active ETFs, although the themes they’re targeting can evolve over time. From a top-down, multi-asset point of view, these can fill the gaps in portfolios in a dynamic way. These can be a really good way of getting the exposure you want if you’re able to stay on top of the theme as it evolves. 

So a more active ETF tends to need a more active approach from the investor holding it as well?

If you're holding an ETF more tactically, then you probably want somebody overseeing the management of that portfolio. That lends itself quite well to the advice segment, where you're selecting a model portfolio, but maybe less well for somebody picking an ETF at the outset and holding it for life.

From an asset allocation perspective, getting precise access to an area of the market is key. There are ETFs that are targeting parts of the market that mutual funds aren't operating in, perhaps because there isn't enough breadth in that area of the market to justify building a mutual fund around it. I hope it comes to a point where there is even more choice available and you can choose what's appropriate for a portfolio using ETFs and mutual funds, passive and active strategies, and blending them together to get the optimum solution.

It's going be interesting to see how that develops - whether that's offered in a wrapper at the top level, and what sort of wrapper that is. From the model portfolio perspective, I can't see why we wouldn't want the adoption of active ETFs to give more options in the market. And of course, there's lots of investors who are restricted in their ability to use derivatives, and both active and passive ETFs offer a way to expand their portfolio construction and give more choice to the end investor. That being said though, you don't want to go to the point where you've got too much choice either, and we don't want to have sub-scale ETFs that are too expensive to run.

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