The European ETF market is in its late adolescence: in just a year’s time, Europe will celebrate 20 years of exchange-traded funds. After almost two decades, assets under management in ETFs are getting closer to the mark of EUR 1,000 billion, despite a retreat in 2018 that was caused by falling prices of underlyings. (By the way, a threshold we had always forecasted for late 2021.) Besides strongly rising assets, ETFs have seen many different developments: starting with plain vanilla ETFs replicating well-known indices, the journey went on to fixed income, a major contributor to the success story in the last couple of years. Next was single emerging markets from the Amazon jungles up to the Himalayas. Not to forget smart-beta. And a rising demand for sustainability or SRI/ESG topics that will most likely stay in the headlines in the years to come. The aforementioned developments all require an actively deciding investor choosing from the many alternatives offered. No wonder that evolution took a different path as well: multi-asset-strategy ETFs, or in other words, an ETF investing in other ETFs, applying a well-known strategy that has been highly popular with institutional investors (Chart 1).
Fuelled by lasting low interest rates, a growing understanding of how costs impact long-term performance, and the insight that pensions are not necessarily something the state can provide for, investors large and small increasingly find the idea of multi-asset solutions appealing. In Germany, multi-asset funds have been a success story for long. In particular in the years since the bankruptcy of Lehman demand for such products has risen tremendously. But what’s the idea behind an ETF of ETFs?
The first thing that comes to mind are cost considerations. We know from many comments that investors who are convinced by the fact that costs not incurred translate to personal investment success want to see this in financial solutions as well. ETFs of ETFs provide exactly that. Transparency is another key element of ETFs investors highly appreciate. And ETFs of ETFs can tick that box as well. There are many more features that characterise ETFs and make them successful.
When we planned our first portfolio ETF we had something additionally in mind: assuming that retail investors are long-term clients who save to have a better life as a ‘silver ager’ or want to care for the days when their children leave school and move on to college, they very often are faced with a lack of funds to start big from the very beginning. On the other hand, saving plans with ETFs have been a success for long. But, of course, diversifying beyond an ETF on the MSCI World Index is easier said than done with just little money. A completely different picture evolves with an ETF that combines standard asset classes, comprises all the inherent advantages of an ETF, and offers regular investments with even small amounts of money.
Yet, another critical question to answer before getting to production: how much risk are investors willing to take? Interviews with potential clients at numerous events revealed that a rather classical allocation would be favored: 60% equity, 30% fixed income and the remaining 10% allocated to commodities. And we went one step further: no active allocations. Except for a rebalancing once a year in spring (Chart 2).
A series of three portfolio ETFs. The strategies are rule based in terms of asset class breakdown and updated once a year.
Meanwhile two more portfolio ETFs were added. Now the investor has the choice between equity ETF allocations from 40% on the lower to 80% on the upper end which serves both risk-averse investors and ‘higher risks can mean higher returns’ clients. But it is not only cost-conscious retail investors that buy these portfolio ETFs. In many cases we have seen wealth managers and independent financial advisors (IFAs) purchasing these products. Portfolio ETFs are efficient tools to offer solutions to smaller clients who grow over time, to invest quickly, and to provide a basic investment that is then complemented by a very active approach. In a world where competition gets fiercer and fiercer it is important to demonstrate a focused approach and to clearly underline individual expertise that differentiates a wealth manager from peers (Chart 3). No wonder that investment boutiques have grown in number and importance.
One more remark: Portfolio ETFs are for some wealth managers a way to fight off the challenges that arise from robo-advisors. Portfolio ETFs are good points of entry and can easily be used as core investments themselves. What makes ends meet. And eventually gets happy smiles on the faces of both investors and wealth managers.