ETF of ETFs: When will the latest fund structure hit the UK market?
ETF of ETFs will be the next passive structure to look out for in the UK asset management industry, as commentators predict it will “definitely” be a growing area in the next few years.
Although the fund structure is yet to hit the UK, there have been a number of launches in the US with the most recent from Ocean Capital Advisors, the hedge fund led by veteran investor Jim Rogers, listing a global macro ETF of ETFs on 21 June, which uses artificial intelligence to invest in single-country ETFs.
In addition, last month Vanguard launched the Total World Bond ETF, which tracks the Vanguard Total Bond Market ETF and the Total International Bond ETF and has a total expense ratio (TER) of 0.09%.
Furthermore, there is one ETF using this structure listed in Europe: Deutsche Asset Management’s £325m Portfolio UCITS ETF was launched in 2008 and is listed in Germany and Italy.
Andreas Beck, chief executive of Index Capital and manager of Deutsche AM’s ETF of ETFs, said the advantage of the structure was investors could fulfil their investment goals with one product, instead of having to asset allocate themselves.
However, so far there have been very few launches in the space, Beck said, as the main adopters of ETFs were fund managers who used them as building blocks in portfolios.
Nonetheless, he added the increasing use of ETFs from retail clients could see more demand: “The market will change through technology and new regulation and there will come a time when this structure will be used more.
“If you buy single ETFs, the market is always changing, so you always have to manage your investments. The fact is investors do not have an investment goal of following the market, but to follow a balanced strategy, for example.”
His views were echoed by Hector McNeil, co-CEO of white-label platform HANetf, who said one of the biggest issues when investing in ETFs is deciding the asset allocation: “If you are a self-directed investor, how will you have the expertise and knowledge to put a portfolio of ETFs together, whereas an ETF of ETFs is already an asset-allocated product.”
Within Deutsche AM’s ETF of ETFs, Beck said he solely invests in the group’s Xtrackers ETFs in order to minimise costs.
He added that as he is using mainstream asset classes such as equities and fixed income, there is plenty of choice.
However, McNeil said there was a question mark over providers using their own ETFs from a performance perspective, instead of third-party funds.
“If you use third-party products, that will be a product of choice. Instead of putting your own products in the structure, you are taking a look at the best solutions available.”
Meanwhile, the most likely providers to launch an ETF of ETFs in the UK, McNeil said, were wealth managers with meaningful AUM because instead of “writing cheques to the big players”, they can launch a product that is solutions-based.
“Everything you can get in mutual funds will end up in an ETF,” he continued. “The fund-of-fund structure will come in an ETF. It is an attractive structure for a wealth manager as they can create an ETF version of their internal balanced fund, for example, and then market that to third parties through an exchange listing.”