A lot of client portfolios now have a tilt towards gold through an ETF; and high-dividend ETFs are another growing area for clients in the retirement phase.
“You can have a tilt for a client in the income phase and if they want more exposure to dividends or a higher level of dividends than the average market, then that’s a way of actually getting exposure to that sort of area,” he says.
“If you drill down looking into the comparisons of StreetTracks, Russell and iShares, they all actually operate quite differently. StreetTracks has quite a high financials component, Russell is midstream and iShares has quite a low financials exposure. So you may have a client that’s got a lot of bank shares specifically, so the iShares may complement them as far as having lower financials but has exposure to other areas.
“Or you can start to drill down into various sectors depending on what kind of portfolio you’re looking to generate. So certainly there [are] more options occurring there.”
Drew Corbett, head of investment strategy and distribution at BetaShares, says the greater choice in ETFs means that advisers can utilise them as key tools to tilt portfolios to the particular sectors they believe are generating higher returns.
“The beauty of it is ETFs deliver virtually the main sectors of the market,” he says.
“They can reflect a tilt towards, or an overweight in, that sector through the ETF, rather than just through one or two stocks in their portfolio, which obviously doesn’t give them the diversity across all the companies benefiting from the export boom of [raw] materials to the rest of the world.
“Traditionally, if they were using stocks to reflect an exposure, if you looked last year at the ASX 200, [out of] the top 25 performing stocks, 21 of them were resources stocks.
“Of the 21, none of them were BHP or Rio, which are the two biggest resources stocks, and probably the most widely held in Australian portfolios.
“So therefore, advisers using ETFs in their portfolios reflect an overweight to resources; or if they were more focused on dividends and they wanted to reflect an overweight to the financial sector, they get the benefit of the ETF owning, based on their cap weightings, all the stocks in that sector.
“ETFs have seen terrific growth – over $5 billion in assets, and we’re now up to 51 products and I expect a few more products this year,” Corbett says.
“One of the conclusions that the market has come to is that about 90 per cent of a stock’s performance is usually related to the performance of the overall market and the sector that the stock is in.
“Just getting the sector right generates the bulk of your return, as opposed to determining whether BHP is going to outperform other stocks.”
ALPHA STRATEGIES
Planners can use an ETF as a low-cost anchor in portfolios, replacing more expensive managed funds, or a number of individual equity holdings.
Bronwyn Yates, product specialist exchange traded funds at Russell Investments, says an anchoring approach allows for additional equities or managed funds to be blended with the ETF, and can provide other opportunistic returns.
In this situation, ETFs should be recognised beyond their traditional passive abilities.
“By having this core, it allows investors and advisers to measure the progress of the portfolio – of what’s happening to the core and also what’s happening to the additional investments,” she says.
Where clients are more focused on a higher level of dollar income as an outcome, planners can use an income ETF to achieve that certain level.
“There’s a transparency so they can know what’s actually in their portfolio and what they might want to blend with that portfolio,” Yates says.
“But because it comes through as a single holding, they can demonstrate a clearer picture of the level of income they’re receiving and how it is achieving their stated goal of a certain level of income.”
THE BUCKET APPROACH
In addition to using an ETF in the anchor approach, clients are combining this with strong growth individual securities and then applying a margin loan over the whole exposure.
Yates refers to this as the “bucket approach”.
“The ETF is acting almost like a defensive exposure that generates income to offset some of the margin expenses, and the opportunistic securities [component] is delivering more aggressive exposures.
“We’re seeing growth in using ETFs in geared exposures in a portfolio,” she says.
“So whether it be margin lending, we’re also seeing self-funding instalment warrants using ETFs as part of their underlying exposure or engine.
“What’s great for investors is that, sure, they’re getting a diversified exposure, but still getting a geared exposure into the marketplace.
“And by using income ETFs, the income that is generated from the underlying portfolio goes part of the way to paying off the lending expenses.
“So again these ETFs, and the single security holding of them, makes them a very easy way to implement a geared exposure into your portfolio.”
INDEX CONSTRUCTION
Understanding how indexes are built plays a crucial role in determining where ETFs belong, as they essentially track an index.
Index provider MSCI has been building indices for the investment market since 1969, holding the longest history in index building for global markets and constituent countries.
Michael Anderson, executive director MSCI, says they build indices that represent the market as best as possible in regards to their liquidity.
