The increasing diversity and sophistication of bond ETFs means the role they play for fund selectors has expanded rapidly and is likely to grow further, according to ISGAM’s Marianne Rameau.
'Further definition in bond ETFs will allow investors to put together their own preferred fixed income exposures and manage duration, country risk and credit risk separately through using targeted ETFs', she told Citywire Selector.
Rameau, who is responsible for ISGAM’s portfolio management department, said ETFs will become more popular, as they are able to satisfy the quest for lower fees, greater transparency, and the need for efficient, targeted exposure.
‘The use and sophistication of factor investing, including ESG factors will increase. Academic research has only just started focusing on this area, examining its robustness in outperforming a plain vanilla benchmark as well as best practice in weighting strategies.’
Rameau said equity-focused passives will remain most useful in countries such as the US, where they can be used for efficient management of US share portfolios in industry sector ETFs.
‘They can be used to quickly gain or reduce exposure to an industry sector, whilst for instance still searching for preferred stocks to fill out that sector. Passive ETFs for the US market offer the lowest cost, are the most liquid, and suffer the least from inefficient or stale pricing.
‘In more fragmented less efficient markets such as emerging markets, but also Europe, it is still possible to find active managers that outperform their benchmark after costs, through superior stock selection.’
‘Also, emerging market ETFs have higher expense ratios and tracking errors than US passive ETFs, giving them less of an automatic advantage over active managers,’ she said.
Over the past ten years, Rameau said ISGAM’s use of ETFs has increased significantly, especially in efficient markets that are hard to outperform in for active managers. ‘More recently we have been selectively using smart beta or alternatively weighted ETFs to implement targeted factor strategies, mainly for our US exposue,' she said.
Rameau said she started using the ETF in the mid-1990’s for core US large cap exposure. ‘Having very low-cost exposure to the most efficient stock market in the world and being notoriously hard to beat by active managers, is an attractive proposition.
‘The first gold ETF was launched in 2004, and we have been using it since launch. It’s the most cost-efficient, liquid exposure to the price of gold bullion retail investors can have, whilst being backed by physical gold.’