Scheme ETF usage picks up but obstacles remain

Asset managers are increasing investments in ETFs on behalf of UK schemes, often as a short-term means of gaining access to certain markets.

“There’s a view around of wanting to reduce risk in a certain way or needing exposure to a certain market,” said Tim Giles, partner at consultancy Aon Hewitt.

“It could often be easier to go via an ETF; it can be a fairly rapid way of moving into a market and a liquid way too,” he said.   

Since ETFs do not require the investor to purchase underlying securities, using them can be an effective way of testing the water in new markets.

The strategy has also been used by managers as a way of investing without requiring them to raise an amount of capital, which would disrupt the rest of their portfolio. 

Mark Nicoll, partner at investment consultancy LCP said: “[However] if you wanted to get light exposure to a market for long term – two, three or four years – and manage that exposure, an ETF is not the best, most cost-efficient way of doing that."

Schemes would be better invested in options such as long-term index tracking funds, he added.

Barriers to uptake

ETFs are a more established investment tool in the US and elsewhere in Europe.

You need to manage them on a day-to-day basis

Tim Giles

Investors have used ETFs to solve an investment problems and then expanded their use across their portfolio, said Eleanor Hope-Bell, head of SPDR UK, State Street Global Advisors ETF provider.

She added, some investors use the strategy as a placeholder when looking for investment managers, a pattern she expected to be replicated more commonly in the UK.

But one stumbling block perceived by managers for uptake is the role of consultants in investment decisions. 

"The relationship that a pension fund in the UK has with their consultant, is far more... than in other European pension funds we have seen," said Hope-Bell. "[There is] another counterparty that has to be considered."

George Osborne, chancellor, removed stamp duty and reserve tax applied to purchases of UK-domiciled ETFs in his most recent Autumn Statement.

Previously, investors using UK-domiciled ETFs would be charged double stamp duty – once when buying a basket of shares and again when buying the fund in the UK.

“That’s levelled the playing field a bit rather than make them a lot better in our mind,” said Giles. He called upon schemes to consider the following:

• The total cost of owning an ETF, including management and transaction costs;

• Check they are compliant and holding assets safely;

• Ensure they do not get close to trading and need a manager to do that for them.

“You need to make sure how you’re going to hold [ETFs] and manage them on a day-to-day basis,” he said.