First published in Pension Funds Online, 25th June 2014
PTL’s Simon Riviere takes a closer look at the pros and cons of exchange traded funds and asks if trustees should be considering them.
The trustee board had fallen silent; the meeting had been lively up to this point.
“ETFs?” asked one of my co-trustees.
“I’ve heard of them, but never advised on them,” admitted the investment adviser.
“Yes, ETFs,” I replied. “Exchange traded funds. They’re the new kids on the block in the UK in investment terms, although they’ve been around in the retail markets for a while now, especially in the USA. ETFs are taking a foothold in the institutional markets and more pension funds in the UK are using them. Globally, there’s been strong growth in these products. As trustees, perhaps we should be considering them?” This last question was directed at the investment adviser.
“Perhaps,” he replied. “But they don’t suit every fund. Let me cover the basics.”
ETFs are index-tracking funds and are designed to mirror the performance of an index, such as the FTSE100. These types of ‘simple’ ETFs aim to track the underlying market or asset class as closely as possible. One of the advantages of an ETF is that they can be bought or sold at any time of the day that the markets are trading. Like a unit trust, shares within the ETF can be created or redeemed and this helps keep the price closely in line with the underlying index or asset, instead of being priced according to supply or demand…