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ExchangE-tradEd funds

“Investors have been turning to ETFs as an efficient means to express their views during these uncertain times”

remained reliable in the storm,” he says. “During the most recent volatile period in August, iShares trade volumes averaged $2.4bn per day, a marked increase over the three months average.” Thompson agrees that ETFs have proved

hugely popular and tactically useful in recent times, but he does have certain reservations. “ETFs can indeed reduce volatility in an overall portfolio – for instance if you buy a gold ETF you would have a better balanced portfolio than if you just stuck purely in equities. However it has to be said that in extremely volatile markets all asset classes tend to head in the same direction. Gold provided a haven for investors when the markets plummeted this year but back in 2008 all asset classes headed south.” A further argument is that ETFs, with

their low cost and high flexibility, will put fund managers out of business. This ‘active vs passive’ debate has raged for decades now – why invest in a managed fund that costs more in charges and struggles to beat its index when an ETF could serve you far better and cost you significantly less? Thompson appreciates the logic but

suggests the argument does not stand up to closer scrutiny. “There are some very skilful fund managers out there, and in some instances investors would rather an active manager use their expertise in a particular sector on their behalf. You also have to remember that many fund managers themselves use ETFs so investors enjoy a win-win situation.” Martin Gray of Miton Asset Management

is one such fund manager. He agrees with Thompson that ETFs often sit well alongside managed funds rather than being viewed as the alternative option. “Without a doubt ETFs are a useful tool

in reducing volatility and accessing certain markets. My Special Situations fund currently has 10 per cent in ETFs (shorting the market) providing protection. You can get into markets like metals easily via an ETF if you so wish, and in general during volatile periods they are very easy to trade, whereas unit trusts are priced daily and investment trusts have liquidity issues. However for the longer term and in more favourable markets I would

22 October/November 2011

prefer to use fund managers who will add value over time. “I accept there are managed funds that underperform and fail to beat their index, and in certain instances an ETF or tracker fund might be a preferred option,” he continues. “But when things are on the up, why would I want to hold an ETF for the long-term when I can buy a fund like Richard Buxton’s Schroder UK Alpha Plus and benefit from being in the right fund on the upside?” Neil Mumford, Chartered Financial Planner

at Milestone Wealth Management believes IFAs and wealth managers will use ETFs periodically to access specialist markets, such as commodities, but in healthier markets will look to active managers. When they do opt for trackers he suspects it will be for traditional FTSE tracker unit trust funds over

ETFs: the lowdown

l AFTER celebrating its 10th birthday in Europe last year, the ETF universe has continued to expand, from ETFs tracking well established stock market indices such as the FTSE 100 or FTSE All-Share, to more exotic offerings, such as bond ETFs, utilities ETFs, Sharia ETFs, exchange-traded currencies (ETCs) or exchange-traded commodities (also ETCs). l Exchange-traded currencies track currency indices that aim to reflect movements in exchange rates between two currencies, and have exposure to local interest rates. l Exchange-traded commodities enable investors to gain exposure to commodities without trading futures or taking physical delivery. There is a vast array of commodity options available, including gold, oil and gas, clean energy and coal. l Short ETFs allow traders to participate in the decline of an underlying index, effectively make money from a falling market. l Unlike hedge funds or absolute-return funds, ETFs are not loaded with hidden charges or hefty performance fees. l UK residents may be able to hold ETFs inside a tax-friendly ISA or self-invested personal pension (SIPP).

ETF alternatives. “The likes of L&G and HSBC offer low cost tracker funds which although not as easy to trade as ETFs, have no dealing charges and do a satisfactory job.” Gray agrees that ETFs can enable savvy

traders to exploit short-term swings in the market, but warns investors to tread carefully. “If private investors stick to vanilla products, such as the iShares FTSE 100, then fine. But my concerns are with other ETFs where many investors fail to understand the contract. For instance most oil contracts are linked to the WTI index, and in some instances oil prices can actually move up but gains get wiped out on contract rollover. These products are not ideal for the armchair investor.”l

DAVID BURROWS writes for Reuters and The Financial Times

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