ETFs are ideal portfolio building blocks for implementing an investment policy because they are cost-efficient, sharply defined, index tracking funds.
What are ETFs?
ETFs are dedicated to investing in one particular investment asset class and are designed to generate investment returns in line with the returns generated by the index for that asset class. This means that they are the purest way of implementing asset allocation decisions.
They provide one-stop access to a broadly diversified portfolio of investments in their underlying asset class without carrying the active manager risk whereby disappointing stock picking within an asset class may undermine the general return provided by the asset class.
Studies show that it is asset allocation rather than stock picking which is the key determinant of the level of long-term investment returns. Over time, few active managers “beat the index” and many suffer periods of damaging underperformance. For investors whose own experiences and observations have led them to share these conclusions, ETFs are an ideal way forward.
Not all ETFs are the same and part of our work is involved in the analysis and monitoring of ETFs to ensure that the ones we include in clients’ portfolios are suitable and meet our criteria
We have repeatedly called for both the regulator and providers to differentiate between ‘simple’ and ‘complex’ Exchange Traded Products. We consider that ETFs are commonly perceived to be simple, low-cost tools.
ETFs offer a number of advantages including simplicity, flexibility, transparency, liquidity and cost efficiency.
All other things being equal, the key test of the effectiveness of an ETF is its “tracking difference”.
The tax treatment of ETFs in the hands of investors will vary with individual circumstances and may change over time so professional taxation advice should always be taken.
ETFs track their underlying indices in one of three ways: Replication, Optimisation/Sampling and Synthetic Replication.
Deciding which mix of investment asset classes is the most suitable in the light of your particular circumstances and how best to profit from the rich universe of opportunities in established and newer global investment asset classes, are the key investment decisions
Charles Stanley Pan Asset