Cost is one of the main selling points when it comes to ETFs, but are low fees enough to continue to peak investors’ interest? One investment professional tells Citywire Selector how he is using passive vehicles.
Selector: Andrej Lippay
Company: Corpia Group (Slovakia)
The development of the ETF industry over the past five years has been exceptional and the introduction of active/smart beta ETFs has supplemented ‘vanilla’ alternatives well. We continue to favour passive ETFs as they offer acceptable exposure to sectors where we don’t have in-house expertise.
However, there is a positive outlook for more innovative approaches. We have used both types of ETFs in clients’ portfolios and, due to the positive tax treatment here in Slovakia and a lower cost structure, we have opted for more of these investments than in the past, but only if the products are suitable.
The new normal
From a cost perspective, ETFs are the way to go, assuming the markets are fairly strong and efficient. We won’t beat the market but in the past 52 weeks we have enjoyed strong growth. Considering that equity ETFs are supplementary in our overall strategy, this is very beneficial.
Recently, we have been interested in EM bond ETFs (EUR hedged), which give our clients exposure to higher yield markets, hedged currency exposure to euro, and coupons that pay out monthly. We are also investing in bond ETFs in developed markets (EUR, short-term).
With increased pressure from investors on costs, established mutual funds are likely to face fierce competition to keep pace with the development of ETFs. The cost structure is a key factor for investors in their decision-making process and demand for traditional ETFs is likely to hold up while markets remain reasonably strong and efficient.
However, there is already evidence that issuers have noticed investors’ changing preferences and have expanded their offering to include smart beta and active ETFs, for example.
I favour absolute return ETFs as they offer a good investment mix, diversifying volatility while providing stable returns.
This article originally appeared in the November edition of Citywire Selector magazine.