In just a couple of years Exchange Trades Funds (ETFs) became a very popular investment vehicle, however, as always when new products are rapidly gaining popularity risks and unwanted side-effects are increasing as well. The new guide by MyPrivateBanking Research “ETFs – Get the Most Out of Them without Taking All the Risks” details five potentially deadly risks involved in ETF investing (default risk, tracking error, costly spreads, exotic ETFs and the special case of currency ETFs) and provides private investors with practical information on how to select the optimal funds for his or her needs.
In April 2010 European domiciled ETFs had almost €200 bn under management. In the first four months of 2010 alone these funds received more than €14 bn in net new money. In Europe there are now 932 funds listed on the exchanges overtaking the USA with 839 listed ETFs. The sheer number of new funds implies that many ETFs are covering the same index but also that a multitude of funds are now covering very narrow or exotic market segments, often resulting in high costs, illiquid markets and non-transparent investments. MyPrivateBanking also found that funds missed their benchmark by a wider margin than in previous years.
“In general, ETFs and similar passive products are a good tool to construct a passive, market-tracking strategy”, emphasizes MyPrivateBanking`s Research Director Steffen Binder his overall positive view of ETFs. “However, given the present "ETF-hype", some private investors fear that ETFs might have their own “dirty little secrets” to make them more profitable for the issuer but also riskier for the investor. Consequently, it all the more important for the private investor to compare ETFs and examine the small print more closely.
In order to answer these concerns the MyPrivateBanking guide for private investors and wealth managers takes an in-depth look at the following major ETF risks: The tracking error; the default, the trading risks and the risks of Exotic ETFs and as well currency ETFs. The guide shows that with simple measures investors can minimize these risks and take full advantage of the passive investment opportunities opened up by ETFs.
“Less than one third of the wealth managers include ETFs in their proposal, with a total share of the assets in the portfolio on average below 10%.”, summarizes Christian Nolterieke, Managing Director of MyPrivateBanking, the disappointing results of the latest MyPrivateBanking survey of investments proposals for wealth management clients. “Investors should educate themselves about the risks of ETFs and then push their advisers to use more ETFs hereby reducing their costs significantly without hurting performance.”
Key recommendations of MyPrivateBanking are to avoid fund-of-fund-ETFs, exotic ETFs together with so-called “active strategy with passive products”, e.g. sector rotation with ETF products. All these products and strategies generate unnecessary costs and risks and diminish the benefits of ETF-investments.
MyPrivateBanking.com is the first independent information and networking platform for clients of private banks and clients of wealth managers worldwide. MyPrivateBanking.com is not a bank but helps you to get more value out of your wealth manager. The founders have the vision to make wealth management a lot more transparent, cost efficient and client-focused – driven by their own experiences as clients of a number of wealth managers.