More than 75% of advisers using ETFs
Advisers are turning to exchange-traded funds in increasing numbers – but there’s a warning not to “set and forget” the passive investments.
Monday, July 17th 2017, 6:00AM 
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by Susan Edmunds
Dean Anderson, product manager for NZX ETF provider Smartshares, said the rate of FUM growth driven by advisers over the past year had been strong.
An NZX poll showed 77% of Auckland advisers were using ETFs in client portfolios, 84% in Christchurch and 70% in Wellington.
Client investment objectives were the biggest drivers for the decision for all advisers, followed by performance and fees.
Across all centres, more than two-thirds planned to increase their use of ETFs over the next year.
Anderson said the growth in adviser FUM this year had already surpassed that of the whole of last year. Smartshares’ external FUM is up more than 22% year-on-year, after 10% growth between 2015 and 2016.
He said ETFs were a tool for advisers that offered tax benefits, ease of access to markets and low-cost diversification.
There were dozen of firms, and subsequently hundreds of individual advisers across New Zealand holding Smartshares ETFs either directly or indirectly via model portfolios, he said.
They would suit a core/satellite approach, he said, with the core of portfolios in low-cost diversified investments in listed markets, such as ETFs, and satellite investments to add alpha to increase the chance of out-performance, or to tailor a portfolio in line with the client’s wishes.
But Anderson said he was surprised by the number of advisers at recent Smartshares workshops on ETFs who were not even aware of the core/satellite model.
Adviser Simon Hassan said adviser interest in ETFs was driven by the cost. His firm used ETFs for half its international exposure, he said.
There was an inherent risk that portfolios would slump if the market did, when they were invested in ETFs, he said, because the funds simply track an index. But he said advisers could actively manage their ETF exposure.
“Advisers who use ETFs like we do don't just go in passively and forget it. If we thought a downturn was under way we would reduce our exposure to ETFs and put more into cash to get through it.”
Anderson said it was possible that Smartshares might explore roboadvice options in future. ETFs have been used successfully with robo platforms internationally.
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- Start with a passive core comprised of low-cost ETFs and ETF-based index products for about 50% of our exposure to local and international equities,
- Add a mix of active managers - selected based on disciplined research - with a view mainly to reducing risk, and
- In following this strategy – whilst retaining the utmost respect for the relative efficiency of large, liquid markets – we keep our eyes and ears open – especially as to the smaller and less efficient NZ – and to an extent Australian – markets, with a view to reducing risk.
Where we decide to 'tilt' away from target asset allocations, this is not so much in seeking higher returns. More than anything any tilting decisions reflect an attentiveness to investor psychology - including the behavioural investing finding that investors feel losses more keenly than similar sized gains. We do not always have tilts in play, and while in play a tilt may take us up to 2 or 3 percent away from target for a particular asset class.