Interest - and retail money - in exchange traded products (ETPs) has been rising steadily over the past few years, and seems to have accelerated since the RDR. Laura Miller asks why - and what - it means for advisers and investors
ETPs – a type of security that is derivatively-priced and which trades intra-day on a national securities exchange – were once the preserve of institutional investors, and largely unloved by retail advisers.
Pre-Retail Distribution Review (RDR), this was partly due to the fact that advisers who derived their income from commission had little incentive to advise on a product that didn't pay it.
There were other obstacles. ETPs encompass a variety of products, mainly passive but some actively managed, from exchange traded funds (ETFs), to exchange traded notes (ETNs), to exchange traded commodities (ETCs).
'Our holdings of equity ETFs have grown over 50% since the start of the year,'
Some are backed by tangible assets like gold, others are synthetic and do not hold the underlying assets the product is designed to track.
This market complexity drew the attention of the regulator – then the Financial Services Authority – both in 2011 and 2012, when it flagged up a number of consumer risks associated with the products.
However since then, the regulatory furore over ETPs has died down, as the industry put in effort to make itself more transparent. And post-RDR, advisers can no longer receive commission on any investment products, so the playing field for ETPs has levelled.
Hargreaves Lansdown passive investment manager Adam Laird said he has seen a "real growing interest" in ETPs in the years leading up to the RDR, which has continued apace since the rule change.
"Holdings of ETFs on our Vantage platform have grown rapidly in the last few years, with 88% growth since 2010. Many advisers are looking at the lower costs of these products to protect margins on advice."
Laird said ETFs are being used to get access to areas that are difficult for clients to invest in through traditional funds, or where active managers don't consistently add value. Investors are often combining ETFs with traditional funds – either active or passive – in their portfolios as tactical investments.
"In 2013, equity ETFs have been most popular. Our holdings of equity ETFs have grown more than 50% since the start of the year," he said.
Provisio Wealth Management makes extensive use of ETFs in its model portfolios.
Director Andrew Whiteley said this is because he wanted to replicate his firm's asset allocation calls as accurately as possible in order to ensure the risk/return integrity of each of its portfolios.
"By using ETFs rather than actively managed funds we could be sure that no big ‘bets' by an active manager threw our asset allocation out of balance," he said. "We were also able to achieve much greater granularity in our asset allocation, for example different gilt maturities and individual commodities."
By using ETFs, Whiteley has been able to offer his clients a range of risk-graded, multi-asset portfolios with total expense ratios (TERs) of less than 35bps.
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