THE CHALLENGE OF CHOICE

With the huge explosion of number of products within the ETF universe potentially this hazard of incorrect choice is now just as relevant when selecting the appropriate ETF to invest in. According to independent research firm ETFGI there are close to 10 000 exchange traded products listed on stock exchanges around the world, with 87% of those being ETFs.

According to the ETFGI graphic the number of exchange traded products has more than doubled over the last decade, creating greater choice and greater selection headaches.

With New York as the world’s financial epicentre, we find that the vast majority of ETF assets are held in those ETFs listed on the US stock exchanges. A large part of these assets are focussed on US assets, including those held within the five largest ETFs. Where these ETFs often differ is which index they seek to replicate. Some ETFs replicate indices provided by S&P, others utilise data provided by MSCI and others tracking the FTSE/Russell series of indices. It is no longer just as simple as saying “I want exposure to US equity” and buying the first ETF that pops up.

The sheer number of ETFs makes ETF selection as difficult. In the US there are roughly 6 000 listed companies and close to half that number of listed ETFs. Even the most optimistic would have to agree that at best selecting the right ETF is only half as difficult as selecting the right share to invest in. We disagree with that as even 3 000 ETFs is a huge universe for any individual to truly have an all-encompassing opinion.

Just like investing in shares, investing in ETFs requires the application of filters to narrow the field and then for a high level of research to be conducted on those results. In the ETF universe we are seldom comparing apples with apples and each ETF has attributes that need to be carefully considered.

At Magwitch we have a few non-negotiables that we need to be comfortable with before any investment recommendation on an ETF:

• The sustainability of the issuer
• The suitability of the underlying index
• The cost of the ETF
• The liquidity of the ETF (the ability to sell in a tough environment)
• The tracking accuracy
• The physical holding of assets with no hypothecation

We often say that with the rapidly growing ETF universe that there is literally an ETF for everyone. It just takes a bit of work to find yours.

Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.