Blue Chip Issue 79

EXCHANGE TRADED FUNDS
Why the world
has moved to
investing in ETFs
ETFs are here to stay, and the growth shows no signs of decline
Records continue to be broken by the $8tn Exchange Traded
Funds (ETF) industry as it experiences its best start to a
year ever with inflows topping $152bn within the first
two months of 2021. These impressive statistics maintain
momentum for an industry that took in a record $502bn in 2020
according to Morningstar, Inc., while at the same time investors
pulled $289bn from open-ended mutual funds.
It is the fourth year out of the last six that mutual funds have
lost money while the ETF industry has never suffered a year of
outflows. This ETF growth is more impressive given that a year ago,
the market experienced one of the most volatile periods in recent
history as the economic impacts of the global shutdown took effect.
The resilience of the product
structure and supporting capital
market infrastructure saw them
not only weather the storm but
cement their status as the go-to
choice for investors to trade
during market stress.
ETFs are the preferred
investment vehicle for most
of the world due to several
structural benefits. In addition
to diversification there are a few
often cited reasons why the global investor prefers investing with
ETFs. The most accepted reason is the low fees. Without teams of
analysts and portfolio managers, the ETFs naturally have a lower
expense ratio. ETF.com estimates that the average US equity
mutual fund charges 1.42% in annual expenses, while the average
equity ETF charges a significantly lower 0.53%, with many of the
larger ETFs charging even lower fees than that.
Although cheaper, there is no negative impact on performance.
Twice a year S&P Dow Jones Indices release their SPIVA scorecard,
which is an analysis of the performance of active funds versus
the performance of their benchmarks. In the latest report they
calculated that three quarters of US active funds underperformed
the S&P500. In most instances the greatest reason for
underperformance by the active funds is the drag of the higher
expense ratios.
ETFs have a significant advantage when it comes to transparency.
Most funds only disclose their top 10 holdings whereas it is
possible to find details of every holding within ETFs down to the
smallest instrument. ETFs regularly readjust their holdings to bring
their underlying instruments in line with their benchmark indices.
Each ETF issuer may differ on the frequency of this, but they all
have clearly disclosed methodology detailing when they will do
this rebalancing. Any adjustment to the portfolio is done so in line
with the benchmark.
ETFs are the preferred investment
vehicle for most of the world due
to several structural benefits.
The final ETF benefit that we want to touch on – probably the
most important during the recent market crash – is that of liquidity.
The Bank of England noted this in their Interim Financial Stability
Report with specific reference to the US bond market during the
crash. They stated, “In light of the relative liquidity in ETF shares
compared to the corporate bond market, price discovery was often
occurring via ETFs rather than their underlying assets.” ETFs offer
liquidity both in the primary market with the ETF issuers and in
the secondary market on the exchanges. This ability to trade on
an exchange meant that even when the underlying assets were
illiquid one could still enter and exit investments.
The global investor has selected ETFs as their default investment
vehicle of choice. They have done so based on all the advantages
that they offer.
Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their
portfolios are available through offshore endowment structures provided by some of the larger insurers.
30 www.bluechipdigital.co.za