As an ETF strategist, much of my time is spent parsing the differences between funds in an ever-increasing universe of exchange-traded funds (and other ETPs). While I believe industry growth and innovation is healthy, it’s easy to see why many advisors find the challenge of sorting through and effectively selecting a portfolio of ETFs overwhelming. Perhaps this helps explain the rapid growth of third-party ETF asset managers over the past few years. According to Morningstar, which tracks around 490 strategies from 120 firms with assets of $50 billion (as of June 2012), assets in these types of accounts increased by 30% during the first half of 2012. They increased 48% since September 2011. What is it about ETFs that asset managers have come to find so appealing compared to individual securities?
While ETFs have come to serve a variety of purposes for asset managers, those who have most increased their usage of ETFs often provide very similar reasons for doing so. Frequently, potential cost-savings is near the top of that list. It may seem counterintuitive that a packaged investment like an ETF would be less expensive than utilizing individual securities, but after considering the custodial and trading costs for individual foreign securities, certain international ETFs may provide significant savings. According to David Allen, portfolio manager at Accuvest Global Advisors, which manages about $440 million, his firm “views single-country ETFs as the most cost-efficient way to gain access to the markets in countries that we believe are most attractive.” Another attribute of ETFs that many large asset managers are beginning to appreciate is the potential for better liquidity. For active managers operating in a world where new information is disseminated in moments rather than minutes, liquidity has become paramount.
“The ability to move quickly when markets move is a big advantage of ETFs for a tactical manager,” explained Jeff Hays, president of Hays Advisory, which manages about $850 million. “While it may take a week or two to work out of a large position in certain individual stocks, I can execute a large ETF trade in a matter of seconds.”