ETFs not ideal for all allocation aspects, says S&P

Although exchange-traded funds (ETFs) have been gaining significant traction ever since the global financial crisis, investors should be fully aware of their capabilities as an investment.

That is the view supported by the research house Standard & Poor’s Fund Services (S&P) in its latest report entitled ‘Exchange-Traded Funds Increasingly Popular in the Australian Market’.

The report claimed the current array of ETFs available on the Australian Securities Exchange was cost effective, transparent and efficient to transact, but warned investors should be aware that ETFs “do not necessarily provide investment solutions for all allocation aspects of portfolio construction, [such as] currency hedging or foreign equity exposures”.

S&P’s wealth management director, Jeff Mitchell, said investors needed to educate themselves and be fully aware of the potential role of ETFs in portfolio construction.

“It is important to remember that ETFs are not all the same due to structural differences in their construction,” Mitchell said. “However, for investors who want to passively invest, ETFs can prove an attractive option if they accord with the investor’s allocation strategy,” he added.

Exchange-traded funds have been part of the listed securities landscape in Australia for almost a decade, but with a very limited range, the report stated.

However, the report said, the broader range and lower cost of ETFs is seeing them gain popularity and begin to take a larger share of the passive strategy allocation.