Just as one of the world’s major consulting and multimanager groups is about to launch Australia’s first active exchange-traded funds (ETFs), an arch-rival consulting firm has questioned the attractiveness of the investment vehicle for institutional investors.

Russell Investment Group’s chief executive, Andrew Doman, announced in Sydney on October 28 that the firm would launch a range of active ETFs in the first quarter next year, with Australia scheduled as one of the first countries to see the new products. To date, State Street Global Advisors, Barclays Global Investors (iShares) and Vanguard Investments have offered indexed ETFs in this market. In the US, several managers, such as Invesco, have offered active ETFs for several years.

The former BNP Investment Management attempted to launch an active ETF in Australia in 2001-2002 but could not gain traction and the business was eventually acquired by Wilson HTM and the ETF project shelved. (BNP’s business in Australia has been subsequently developed as an international multi-affiliate offering.)

But while the ETF market has expanded since SSgA pioneered it in Australia – and is expected to expand further as financial planners move to a fee-for-service, rather than commission, remuneration model – Watson Wyatt recently published a critical client note urging caution about the use of ETFs by institutional investors.

The Watson Wyatt note said: “The vast majority of ETFs are an unattractive long-term investment option for most institutional investors …  While the development of the sector has driven a great deal of product innovation, institutional investors should consider ETFs in conjunction with alternative options because ETFs generally have higher fees than many institutional index products; may have tax implications that require specialist advice; and often contain counterparty risks which investors may not be compensated for.”

The firm also suggested that there was a great deal of development within indexation, which was likely to offer passive investors a broader range of options and better risk-adjusted returns than those currently available in the ETF market.

The Watson Wyatt note, published on December 10, was widely criticised by ETF providers around the world.

ETF vendors have long hoped that intitutions would consider using the vehicles in transition management, however TMs spoken to by I&T News say they prefer futures because they are cheaper.