Helping your clients get a slice of the ETF cake

  • Author : Jody Roblin
  • Date : 21 Sep 2020

ETFs celebrated their 30th birthday in 2020, with the first successful ETF having been launched in Canada in March 1990. The global ETF market is growing fast, reaching $6.35 trillion at the end of December 2019 – a very significant rise from $4.3 trillion in 2017.

It’s easy to see their appeal; by making it possible to track an index, ETFs effectively allow investors to trade market indices on an exchange, whether that be a broad market index like FTSE-100 or a sector index such as Global Infrastructure. ETFs combine the performance of the traditional tracker funds with the flexibility of ordinary shares.

In the early days, ETF investing was – unfortunately – the preserve of the rich due to high unit prices. Today the high unit price remains, but this no longer needs to be a barrier. With Novia leading the way, a small number of platforms have introduced fractional trading, so that it is now possible to invest in ETFs without risking a drag on performance through holding additional cash, when buying full units isn’t possible. At Novia we have calculated that fractional trading can save as much as 1100bps* in client fees over a ten-year cycle, which would be an additional return of £11,267 on a client’s £100,000 portfolio over a 10-year period.

So, whilst proven demand was a driver for platforms and DFMs to add ETFs to their offering, the real key for using ETFs on platform has been fractional trading. This is why we are pleased to have been the first platform to offer fractional trading of ETFs back in 2017. At last the high unit price of Exchange Traded Funds was not a barrier for smaller investors.

With this barrier gone, c2000 ETFs listed on the London Stock Exchange become available; how do you select the right ETFs for your client?


ETFs come in many flavours

There are various types of bond, such as:

Bond ETFs – These are usually used to generate cash from interest on the individual bonds held within the ETF. Bonds help provide stability and give defensive characteristics to a portfolio. Bond ETFs invest in a specific basket of debt securities such as corporate bonds, sovereign bonds and high yield bonds as well as providing granular exposure in the duration.

Specific maturity ETFs – These ETFs invest in bonds of specific maturity profiles (0-5 years or 15 year+) providing investors precision investment tools to target a specific bond duration in a portfolio.

Cash proxy ETFs – These ETFs invest in Ultra-short maturity investment grade bonds which have very low sensitivity to interest rates and deliver slightly better than cash returns but have very low volatility.

Stock ETFs – These are usually intended for long term growth and comprise stocks. Equities help deliver higher returns than bonds over the long term but carry higher risk.

Sector ETFs – These invest in a specific sector such as industrial, mining, healthcare, technology, energy, consumer goods and many others.

International ETFs – These may include investment in a particular country or a geographical area.

Thematic ETFs – These ETFs invest in stocks which are expected to benefit from megatrends which are powerful transformative forces that are changing the global economy like Cybersecurity, Robotics & Automation, Clean Energy, Agriculture, Water, Ageing Population and many more.

ESG ETFs – ETFs that hold ESG compliant stocks or bonds for investors with an ESG preference.

Investors can also use ETFs to invest in alternative asset classes like gold, property, infrastructure, private equity and commodities. Commodity ETFs allow a chosen group of commodities to be bundled into a single investment.

Within these many options come further market exposure considerations:

  • Type of debt – corporate versus sovereign exposure, credit rating and duration
  • Size tilt (large cap, mid cap, small cap)
  • Style (income vs. growth)
  • Factor based or Smart Beta (yields and durations for bonds, dividend yields for equities). These invest in stocks that display certain investment characteristics like price momentum, low volatility or quality
  • Currency exposure (Hedged or Un-hedged)

ETFs now offer investors, advisers and discretionary managers a large number of options to construct portfolios that contain specific exposures, helping them express their investment views and philosophy cost-effectively. ETFs, being rules-based investment funds, also give the investor assurance that they will not deviate from their mandate and will continue to deliver on the expected exposure with high precision. With qualities such as these, it’s no surprise that ETFs have grown by over $2 trillion in the last three years nor that the trend is expected to continue.

 *Novia internal calculations for a £100,000 portfolio invested in 10 ETFs, assuming 8% growth pa and 16% volatility.

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