Consider the trade-offs
It takes just one investment in an ETF to get market exposure, whereas futures contracts have to be rolled over, adding to costs. But the trade-off to consider is the fee embedded in ETF structures.
“An interesting aspect is that if you invest in a passive mandate, the fee comes though in your disclosed costs,” Hartley says.
“But if you invest in an ETF, it doesn’t. It’s the same thing as with listed property and unlisted property.”
Hartley says this is a flaw in the system that can encourage funds to favour listed vehicles over unlisted ones. Ultimately, Hartley says, funds should do what produces the best result for their members.
Just another tool
Russell’s Skelly says ETF providers have some work to do to convince institutional investors of the potential benefits of using ETFs.
“We always think education is needed for advisers and individuals. It’s the same in the institutional space,” she says.
“It’s not what they’ve done. Some of them just don’t have the direct-investing capabilities, so they rely on their managers to make those decisions, their asset managers. So in those situations, we have had conversations with asset managers. Same story – would you use ETFs? Interestingly, often asset managers believe it’s their job to choose the stocks, so why would they use an ETF? They should be able to manage that themselves. Our position is if you are looking for that next active bet, but you want to maintain market exposure, you don’t want to use futures. Use an ETF. Again, it’s new, and it’s taking a lot of time.”
“The thing we’re finding with institutions is when they think about ETFs, they just think it’s a retail solution. They see them as expensive.
“But for tactical, short-term movements, they really can have a role. And it’s not either/or with ETFs – use your derivatives, use ETFs, use your managed funds. It’s just another tool.”
