One of the key drivers behind the impressive growth in the popularity of Exchange Traded Funds (ETFs) is their increasing use as the centrepiece in core-satellite investment strategies.
ETF investors following a classic core-satellite strategy hold the core of their portfolios in index-tracking ETFs. Such investors then hold the remainder of their portfolios in smaller "satellites" of selected direct investments and actively-managed funds.
The core-satellite approach using ETFs can be applied to a single asset class or to a range of ETFs covering different asset classes to create a diversified, low-cost portfolio.
A recent study* by specialist researcher Investment Trends found that more than 40 per cent of ETF-using financial planners believe that the funds provide a good core for an investment portfolio.
When asked by Investment Trends to name the benefits of ETFs, advisers using ETFs place their low cost (90 per cent of the planners) and use for portfolio diversification (more than 75 per cent of planners) at the top of their list.
The benefit of ETFs to provide a good core for a portfolio also ranks highly on these planners list of ETF attributes.
Further, the low cost and diversification qualities of ETFs attribute significantly to their suitability as the core of an investment portfolio.
London-based ETF researcher ETFGI observed earlier this year that more individual investors were using ETFs to follow a core-satellite strategy. And more investors are using ETFs as "building blocks to create entire portfolios", the researcher added.
Consider the rapid growth in the market capitalisation of ETFs listed in Australia and overseas.
Recent ASX research shows that the market capitalisation of Australian-listed exchange traded products – ETFs and Exchange Traded Commodities – grew by more than 50 per cent to $20.7 billion over the 12 months to the end of October.
And the market capitalisation of Australian-listed exchange traded products increased by 119 per cent or $11.2 billion over the past two years. (The vast majority of exchange traded products are index-tracking ETFs.)
The growth in the capitalisation of Australian-listed ETFs in recent years has been from a relatively low base.
ETFGI reports in its latest monthly newsletter that exchange traded products are "on track" to break new records this calendar year in terms of total global net inflows and total global assets.
The total market value of the 6,000-plus exchange traded products listed on 63 global exchanges in 51 countries reached US$3 trillion for the first time by the end of October.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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