Education essential for ETFs to enter the mainstream

The explosive growth of ETFs continues unabated. In October 2015, ETFs/ETPs listed in Europe saw net inflows of $7bn (€6.6bn) and have now reached $510bn in total assets, just short of a new record, according to ETFGI. Globally there are for the first time now more than 6,000 ETFs/ETPs, with more than $3tn in assets.

It is often predicted that growth in the European ETF market, which remains much smaller than in the US, will continue at these high levels as the use of ETFs by retail investors accelerates. But, in the UK at least, many independent financial advisers (IFAs) have yet to be convinced of their benefits.

“I think the biggest factor in the take-up of ETFs is familiarity, education, call it what you like. Their perceived complexity and perceived risk are hindering their take-up,” said Bill Vasilieff, chief executive at Novia, a platform for IFAs and their clients, speaking at a media panel event on ETFs in the mainstream, hosted by BlackRock, whose iShares brand dominates the European market.

Advisers who are looking for cheap passive investments will often buy a OIEC (open ended investment company), he explained, but they do not have anything like the granularity that ETFs have.

“There is quite a bit of education to be done to make IFAs comfortable,” added Mr Vasilieff. “It isn’t easy to educate an entire industry because there are still people pushing against it. There are still platforms, especially some of the older, bigger ones, saying we won’t touch ETFs because nobody wants them so they are trying to squash it because they can’t handle it.”

Those platforms not providing ETFs are missing a trick, said Claire Perryman, head of iShares wealth management and retail sales UK at BlackRock. “Not having ETFs on a platform is like going into a restaurant and only reading part of the menu,” she explained, adding that giving the end investor the widest tool set available can only be a good thing.

There has been a competitive response from the funds industry in the UK to combat the rise of ETFs, explained Stuart Welch, head of brokerage at Fidelity International, for example the launch of low cost trackers. “We need to make sure people understand how these ETFs are constructed and how they work, and what the benefits and risks are, and once people understand that they quickly become quite comfortable with ETFs. The ability to trade them intra-daily, on an exchange in a leveraged way within part of a larger portfolio gives them an advantage.”

The ETF industry should do more to make itself as simple to understand as possible, he added. “Terms like smart beta are another instance of us putting our head in our hands because it is another buzzword that people don’t understand,” said Mr Welch.

But smart beta is one area where financial advisers getting on board, said Novia’s Mr Vasilieff. “If you want the broad index, you’ll buy something like a unit trust because they are very cheap. It is when you want something else, like smart beta, that ETFs come in, but a lot of advisers don’t really understand smart beta. Concepts like these take time to filter through.”