Exchange traded funds (ETFs) are still not a widely understood concept among European retail investors, yet their presence in the institutional market has been coming on by leaps and bounds. It was 20 years ago that Merrill Lynch launched the first two ETFs in Europe, although they had been present before this in the US.
ETFs are a simple concept – listed funds that can be traded like a share, which typically follow a passive strategy, tracking an index, and charge investors much lower fees than actively managed funds. At a time when nearly two thirds of active fund managers fail to beat their benchmarks, a cheap fund that simply tracks an index has immediate appeal.
In this week’s podcast we had the opportunity to talk to Simon Mott, Chief Marketing Officer with TrackInsight, about the ETF phenomenon in Europe and indeed further afield. Simon is an expert in the field of ETFs, having previously held roles with index provider FTSE Russell and white label ETF platform HANetf. He has been a big fan for many years of the ways in which ETFs can make portfolios great again.
In this podcast we discuss how ETFs work in practice, why they are favoured by big investors like fund managers and institutions, and how they can fit into portfolios. ETFs have graduated away from simply tracking famous indexes like the FTSE 100 or S&P 500, and have proliferated into new areas like commodities, thematic investment strategies, and the now emerging active ETFs.
While private investors in the US have now become very familiar with ETFs, thanks in part because so many of them are responsible for managing their own pension schemes, many small investors in the UK are still paying over the odds for consistently loss-making active funds in their SIPPs and ISAs with little scrutiny of the costs. ETFs provide a fresh and cheaper alternative.
TrackInsight itself has emerged as a major player in the funds data space, providing comprehensive and independent data on a massive range of ETFs, with over 6000 of them now being tracked. This gives investors a useful single point of entry if wanting to search and analyse what can otherwise be a confusingly diverse range of funds. The site is rich in tools and analytics for investors to navigate the system and identify the right ETFs for their purposes.
With the rise of robo-advisors which rely on low cost ETFs to provide their own cheaper portfolio management services, the range of options available on European stock exchanges alone is now comprehensive. This podcast serves as a good starting point if you have been wondering what ETFs are and how they fit into your investment strategy.