Product Panel: Review of the year, part 2

Scott Longley

a room with a table and chairs

The second half of the year presented the panel with a wide and eclectic selection of ETFs, some of which were welcomed while others got somewhat shorter shrift.

The end of the summer brought us another emerging market funds, this time with Franklin Templeton’s FTSE India UCITS ETF.

Once again, the message from the panel was that investors needed to look at each potential single-country investment in very specific terms.

“There is no such thing as the common emerging markets since every country and economy are quite different in many respects, i.e. stage of development, political background, demographic structure,” Timo Pfeiffer, chief markets officer at Solactive, said.

“Furthermore, the sector weights can differ substantially. If an investor merely wants a broad EM investment, there is no need for single-country EM funds.”

For Mark Northway, portfolio manager at Sparrows Capital, there was a lack of detail in the fund prospectus which was “sparse in details”. “This is disappointing, and investors should require more upfront transparency in these areas,” he said. “In summary, the Franklin Templeton India ETF is a useful tool for managing tactical exposure to India over the short term, but perhaps not ideal as a strategic portfolio holding.”

Later in July, JP Morgan’s suite of multi-factor ETFs were under discussion with Kenneth Lamont, ETF analyst at Morningstar, saying the company was “making a statement”.

“Aggressively priced, the new offerings are the cheapest multi-factor ETFs targeting their respective exposures,” he continued. “The short live track records for many multi-factor strategies can make due diligence tricky. By ‘porting’ strategies which have already cut their teeth stateside, JPMorgan have given investors the luxury of a longer live track record to examine.”

However, Northway said the “theoretical benefits” of multi-factor funds were more debatable. “Using single-factor ETFs arguably adds complexity since most stocks are correlated with more than one factor – the output factor exposures of a multi-factor portfolio constructed with single-factor ETFs must be measured to take account of non-targeted exposures ETFs and the mix adjusted accordingly,” he said.

Ahead of the curve

The complexities of the yield curve were the next area if examination with the Lyxor US Curve Steepening 2-10 ETF.  Nicolas Rabener, managing director of FactorResearch, said the launch of the ETF could be considered “contrarian” given the fund was being offered even as the yield curve looked to be flattening rather than steepening. “We would expect Lyxor to expand the product range by launching a complementary ETF focused on a flattening yield curve,” he said.

Meanwhile, Peter Sleep, senior investment manager at 7IM, applauded Lyxor’s inventiveness with the fund. “Lyxor has rediscovered their mojo in the last couple of years, particularly in fixed income, and this ETF is a case in point,” he said. “This innovative ETF is designed for sophisticated investors to profit from US yield curve steepening.”

In September, the panel looked at a suite of euro government bond ETFs from Invesco, an offering which Jose Garcia-Zarate, associate director, passive strategies, manager research, Europe, at Morningstar suggested was not original but might appeal to investors seeking a core long-term holding in Euro-denominated bonds.

However, as Rumi Mahmood, investment manager at Nutmeg, suggested, “whether European government bond ETFs will attract significant flows in an environment where negative yields are increasingly prevalent remains to be seen”.

Ben Seager-Scott, head of multi-asset at Tilney, noted the suite of ETFs was priced competitively and will put pressure on the competitors. “Furthermore, the range does not currently engage in securities lending, unlike some of the competition, which is another strongly positive factor in my book,” he added. 7IM’s Sleep, meanwhile, said that the “door is open for the incumbents in this space to respond and drive down overall prices further”.

One of the newer big beasts of the European ETF space was tackled in October with the Goldman Sachs ActiveBeta US Large Cap Equity ETF under the spotlight.

Rabener said Goldman Sachs Asset Management’s entry into the European ETF market “follows the playbook established in the US, where GSAM launched GSLC in 2015, which became the world’s largest multi-factor ETF with $6.9bn AUM”.

Sam Dickens, portfolio manager at IG Portfolios, applauded the new entrant. “Additional competition in the European ETF market is good news for both institutional and retail investors,” he said. “In this case, GSAM’s entry is more likely to result in increased product choice rather than drive fees lower. Looking at their existing product set in the US, GSAM appears to have focused their efforts on smart beta and thematic ETFs.”

Lamont said the new fund was destined to “lock horns with a host of multi-factor rivals in Europe, notably the popular UBS ETF MSCI USA Select Factor Mix ETF”. With an annual management fee of 0.14%, he noted the offering becomes the cheapest multi-factor ETF in Europe.

A day at the races

While the panel generally were behind innovative offerings that attempted to add something new to the European ETF space, there were some new funds which received far from glowing reviews.

In November, GraniteShares released a range of single-stock ETP that, as Rumi Mahmood, investment manager at Nutmeg, suggested, were “leveraged products are more suited to sophisticated and informed investors”. Mahmood said at 99bps “the product is expensive”, however, Sleep was even more direct.

“The other thing to watch with levered ETPs is a daily reset mechanism which means that they can behave in counterintuitive ways if they are held for longer than a day,” Sleep continued. “A holder may be directionally right, but if these products are held for a long time you could lose money. I would rather bet on the outcome of the Gold Cup.”

Then in December, WisdomTree hit the market with a bitcoin ETP. Northway argued cryptocurrencies are speculative assets, “not investments”.

“They are not relevant to investors, and it is not clear that they ever will be. It is not helpful for providers to be using ETPs to facilitate exposure to purely speculative risk classes, simply because demand currently exists; this is the natural realm of CFDs, until regulators wake up to the issue.”

Product Panel: Review of the year, part 1

Lastly, the panel tackled the issue of BMO GAM’s exit from the European ETF space. Raymond Backreedy, CIO at Sparrows Capital, was surprised that another provider was not picking up the range. “There are some great products in the range that would be great for acquisition rather than shuttered.”

Henry Cobbe, head of research at Elston Consulting, said it was a “shame” BMO was exiting the market as it had brought to market “genuinely innovative strategies”,  particularly in the income space and “were building up a solid and differentiated brand in the European ETF space.”

“In any case it is a sobering reminder that scale is essential – which means distribution is key. We see providers who have a robust investment solution as being key to distribution success.”


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