Fund selection plays a crucial role in portfolio construction. Once the asset allocation decision has been made, these individuals need to decide how they want to be exposed, be it through a mutual fund, investment trust or ETF.
Over the years, ETFs have become an increasingly important part of any investor's toolkit. This series will show how the key players across the fund selection space use ETFs in their portfolios while asking what more can be done by the ETF providers to help with this increasing adoption.
Next in the hot seat is Scott Tindle, founder and director of wealth management at Tindle Wealth Management. Tindle started his career at Barclays Capital in 2007 where he spent seven years. Following Barclays, he co-founded a venture capital-backed fintech firm before launching Tindle Wealth Management in 2017.
How much of your portfolio is made-up of ETFs/index funds?
It depends on the client and their mandate but typically about half of the portfolio is made up of index funds. This allows us to obtain relatively inexpensive market exposure (beta) while seeking to optimise for outperformance in the rest of the portfolio.
When did you start investing in ETFs?
We have been investing in ETFs since our firm’s inception in January 2018 and I have personally been investing in ETFs since I began my career in finance in 2007.
Which asset classes do you tend to invest in through ETFs?
While we use both index funds and active funds across the spectrum, we certainly have a bias towards index funds for large-cap developed market equities.
It should be ‘easier’ for active managers to obtain alpha in markets that less well known and therefore, in theory at least, less efficient - like mid/small caps and emerging markets. So, while we do have some index funds in those areas, the bulk of our index exposure is in global large caps and the FTSE 100.
Which areas would you avoid?
Asset classes where liquidity is challenging as well as complicated products that rely on derivatives within the ETF structure.
While there can be liquidity mismatch in a variety of fund structures, the instant liquidity supposedly available with ETFs would certainly be a concern for us if the underlying holdings were inherently illiquid. For example, we would be cautious of investing in certain passive credit-focused ETFs or anything less liquid than that.
We also shy away from derivatives within ETFs. We do not, for example, seek to gain exposure to volatility via ETFs.
What is your methodology for selecting ETFs?
Cost and tracking error are key considerations, as I am sure they would be for anyone selecting ETFs.
We are also concerned about counterparty risk and so would be heavily biased towards investing in ETFs in which the assets are in physical form rather than synthetic (even if well collateralised). Counterparty risk is not something we want to be concerned about during a downturn when our time would be better spent looking for opportunities.
Do you have an ETF provider preference?
Not particularly. Obviously, the reputation of the issuer is important and we carry out significant due diligence, which does lend itself to focusing on the bigger players in the market.
We also use ETFs for relatively vanilla purposes – inexpensive beta exposure to large cap, global equities – that tends to be dominated by the big asset managers who have the scale to compete on price for those relatively simple products.
So, while we do not have a preference per se, we do tend to usually use the Vanguards and BlackRocks of the world.
What ETF products would you like to see more of?
I would like to see ex-UK index trackers with currency-hedged options become more popular.
They do exist but they are relatively small and typically trade with quite a wide bid/offer spread which increases the costs for our clients.
Greater liquidity in these products would make it easier to invest globally, at a low cost, while better managing the foreign exchange risks of our clients.
Are there any areas ETF providers could improve?
Hmm. Good question! I suppose we are getting what we need in terms of support given the relatively straightforward ETFs in which we invest.
Expert investors is a new series brought to you by ETF Stream where on a fortnightly basis we interview the key individuals from across the fund selection and research space about the ETF industry.
To read the previous edition of Expert Investors with James Menzies of Greystone Financial Services, click here.