Choosing the right active ETF for clients

Financial advisers have a wide choice of more than 240 ETFs listed on the ASX to provide exposure to a variety of sectors, themes, indices to diversify clients’ investment portfolios.

Sydney-based fee-for-service firm 5 Financial head of advice and certified financial planner Jason Petersen tells Professional Planner the firm has been big users of ETFs since 2009 replacing their previous focus on direct ownership of equities and international equity exposure.

“We have about 320 clients and a big focus on middle Australia, rather than high-net-worth, because the value-add for them is huge and that’s where we get the most satisfaction,’’ Petersen says.

“Our philosophy is to keep costs low for clients and know that there’s nothing synthetic in there.’’

While 80 per cent of ETFs were passive, the firm used active ETFs as satellites of a clients’ portfolio, to give them exposure to needs such ethical investment or cryptocurrencies.

A holistic financial planning business, 5 Financial relied on research from Lonsec and Morningstar to inform their ETF selections, using only ‘recommended plus’ products.

“Consistency is key; we don’t want to be switching clients in and out,’’ he says.

A gap in the market was exposure to private equity investments, which fund managers have been doing, as a “satellite” holding for clients’ portfolios. He hoped that ETF builders would examine a “broad ETF that helps eliminate a portion of that risk” for retail investors.

Larger financial adviser firms also use passive and active ETFs for their clients due to the low cost of entry for exposure to certain sectors in their portfolios.

Canaccord Genuity Group managed accounts director Tom Collinson works in an international multiservice wealth management firm which has its own in-house research ability to select the most appropriate ETFs for clients.

“We take a slightly more institutional approach. We don’t rely on third party research,’’ Collinson says.

“We’ll look at that research from time to time but it’s by no means the most important part of our [selection process].”

Using both active and passive funds in clients’ portfolios, Collinson expected to see more active ETFs as the market continued to grow.

“In terms of our process, we don’t limit ourselves to Vanguard, iShares or Betashares,’’ he said. “We’ll look at anything.”

However, he was wary of thematic ETFs such as those exposed to electric vehicles, robotics, AI, cryptocurrencies because they tended to launch after they had done well, providing less upside.

The firm’s researchers “delved deeply” into active ETF managers and their backgrounds and prioritised those who have their own personal funds invested in the strategy.

“We believe in active management and the ability of active managers to add value,’’ he says.

Online Financial Adviser InvestSMART which aims to provide accessible and affordable financial advice, recommended passive and active ETFs for its clients.

InvestSMART head of funds management Alastair Davidson says the liquidity and ease of trade were advantages for ETFs over managed funds.

“My advice would be to index a fair proportion of your portfolio with a core/satellite [approach],’’ he says.

Passive index-tracking ETFs would provide the core with active ETFs, private equity, small caps, and alternatives part of the satellite interest in a portfolio, Davidson says.