Are ETFs useful in portfolios? Asset owners share their views
Divergent views about the relevance of exchange-traded funds (ETFs) in portfolios emerged at a lively panel discussion at AsianInvestor’s Asia Investment Summit in Hong Kong on May 23.
The panel discussion witnessed three asset owners - a pension fund, an insurer and endowment fund -- explore the usefulness of ETFs in portfolios.
“The topic of active versus passive has definitely been coming back in recent months, mainly because in the past year, a lot of the [outperformers in the S&P 500] came from a handful of stocks,” Kevin Liem, managing director at family office manager Masan Capital as well as treasurer at Hong Kong Baptist University (HKBU), said.
Part of Liem’s duties at HKBU includes chairing the university’s endowment and pension fund. As such, he sees ETFs from two diverse perspectives.
“As an institutional investor, ETFs are very efficient from a benchmark and reporting perspective. But of course, when you talk to active managers, it really depends on whether they over- or underweighted the ‘Magnificent Seven’ because based on [this] different experience, they will tell you very different things,” Liem said, referring to the seven major US tech stocks that have risen significantly compared to the rest of the market in the last year.
“For family offices, we do a lot of trading, and ETFs and indexes are very efficient vehicles for us to get in and out of an asset class, because of the liquidity,” Liem said.
ETF vehicles are both good for hedging and for buying when markets dip, he elaborated. And even when a market is bottoming out, it is possible to short put — that is, selling or writing a put option on a security — instead of buying a cash swap position.
TOO EXPENSIVE
For the Dutch pension manager APG Asset Management, ETFs are seen to have very little relevance, according to Thijs Aaten, Asia chief executive officer at APG Asset Management.
“ETFs are too expensive for us, but that is very much based on our size”, Aaten said, referring to APG’s total assets under management (AUM) of €569 billion ($617 billion) as of December 2023. “We can negotiate better deals. I don't know where the securities lending revenues go in ETFs, so there's kind of a hidden type of cost to them as well.”
Occasionally, ETFs have better liquidity than the underlying market, which for example might hold for credit portfolios, Aaten elaborated. And if investors want to build exposure quickly, they can first use an ETF, then potentially do an exchange for physical ownership to avoid paying fees in the long term.
“If I hold the securities, there's no fee, so you use ETFs to get in, then ask for an exchange in physical,” Aaten said.
Also read: APG leans on private assets to manage portfolio volatility
Meimei Zheng, associate director and investment strategist at Transamerica Life (Bermuda) Ltd., explained that the insurer currently does not use ETFs for its equity portfolio, but that this position might change soon.
“I think in the future, we may explore the possibilities to consider ETFs and index-related investment strategies, as part of the topic of active or passive investing,” Zheng said.
SHORT-TERM STRATEGIES
Meanwhile, institutional investors are indeed using ETFs for their shorter-term tactical asset allocation and portfolio rebalancing, according to Sue Lee, director and APAC head of index investment strategy at S&P Dow Jones Indices.
“Especially in terms of portfolio diversification, what we have seen recently is a rise in option-based strategies. And passive strategies have also been gathering a lot of assets in this space,” Lee said.
As with index options, some ETF options have attracted a great deal of trading volume. While ETF options are settled American-style with early exercise rights, and in shares of the underlying security; index options are settled European-style, and in cash.
“We see our clients across intermediaries and institutional investors using the index approach in many different ways,” Lee said.
One example on the intermediary side is the building block model portfolio, whereby advisors leverage diversified ETFs, and a large order of the same security is bought or sold by institutional or other large investors.
“Based on the client's goal and circumstances and preferences, they build a well-diversified multi-asset portfolio to meet their goal," Lee said.