Building your multi-asset portfolio using exchange traded products: understanding the basics ETF Securities Liz Wright
Learning objectives An introduction to ETF Securities What are Exchange Traded Products? ETPs as building blocks of multi-asset portfolios Commodities as an asset class Foreign Exchange as an asset class Conclusion
An introduction to ETF Securities
About us $15 billion assets under management (as at 01/09/15) Management listed the world s first gold ETP in 2003 Over 300 ETPs listed on major stock exchanges Partners include BNY Mellon, HSBC, Lombard Odier, World Gold Council Source: ETF Securities
Our product offering Commodity ETCs Currency ETCs ETFs Diversified Precious Metals Agriculture Industrial Metals Energy Livestock Long/Short Currency Pairs: G10 vs USD/EUR/GBP Ems vs USD Currency Baskets Single Country Thematic Diversified Commodities Fixed Income Source: ETF Securities
What are Exchange Traded Products?
Exchange traded products Combining the best characteristics from multiple investment products Characteristic Similar to Benefit Passive investment Tracks an underlying Tracker Funds Tracker Funds Cost-effective way of gaining exposure to a benchmark or an asset as management fees are generally lower than active and index mutual funds Aims to provide the same return as underlying benchmark or asset Open-ended OEICs/Unit Trusts Shares can be created as necessary to meet demand Listed on exchange Investment Trusts Shows exactly how your investment is performing Trades like shares No Stamp Duty Investment Trusts Non-UK investments Buying and selling as easily as shares any time the market is open Exempt from the 0.5% SDRT
ETP classifications Exchange Traded Products Exchange Traded Funds ETF Exchange Traded Commodities & Currencies ETC Exchange Traded Notes ETN
Exchange Traded Funds What are exchange traded funds? Examples of asset types Usually eligible for SIPPs and ISAs Generally UCITS and governed by EC Directive for collective investment schemes Safeguards include: o Segregated assets and limited liability between sub-funds o Increased transparency o Investment diversification limits o Robust risk management Equity Commodities Fixed Income Alternatives Money Market
Exchange Traded Commodities and Currencies What are exchange traded commodities and currencies? Give exposure to commodities (individual or baskets) and currencies (single and baskets) Not UCITS themselves, however eligible for investment by UCITS Usually eligible for SIPPs and ISAs Often governed by the EU Prospectus Directive Examples of exposures Precious & Industrial Metals Industrial Metals Energy Diversified Agriculture Currencies
ETP structure Physical replication Synthetic replication Performance and security by holding the underlying asset Performance through swap Security by holding collateral Result: ETP aims to track an underlying index or asset less fees
ETPs as building blocks of multi-asset portfolios
ETPs as the building blocks of multi asset portfolios Hypothetical Portfolio Examples of ETP constituents Equities 50% FTSE 100 S&P 500 Russell 2000 DAX 30 Emerging Market Gold Mining Fixed Income 35% US Treasuries Global Corporate Bonds EU Government Bonds High Yield Corporate Bonds Commodities 10% All Commodities Crude Oil Physical Gold Currencies 5% EUR/USD G10/USD
Strategic and Tactical Investing with ETPs Strategic Tactical Asset allocation decision: e.g. US equities, short-dated gilts, property, commodities Blend: complement to exposure through active managers Response to macro surprise, geopolitical event: quick market access Sector relative: short-term positioning
Asset class performance in perspective
Benefits of using ETPs Simple Accessible Diversified ETPs are listed and trade in a similar manner as shares through the same brokers and platforms ETPs can be bought and sold whenever the stock exchanges are open as prices are quoted throughout the day ETPs can provide access to an entire index, or alternative asset classes (such as commodities), with a single trade Cost effective Transparent Flexible ETPs provide a cost-effective way to gain diversification through a benchmark of/or exposure to assets previously difficult to access Unlike other investment vehicles, ETP constituents are usually published on a daily basis ETPs can be used to achieve numerous investment strategies
ETP risks general risks Market Risk Tracking Difference Tax ETPs replicate the price movements of their underlying benchmark or asset so their performance is affected by the volatility of their underlying markets Costs The structure and cost of an ETP means it may not track its underlying exactly Currency As with the majority of investments, ETPs will usually incur some form of taxation. Each investor should obtain independent tax advice Investors in ETPs incur two types of costs: internal costs (related to the product) or external costs (incurred in trading the product) Any investment involving a non-local currency will be affected by exchange rate fluctuations (unless the product incorporates a currency hedge)
Total cost of ownership Costs are one of the most important factors for an investor to consider when investing in ETPs The most widely reported cost figure is the total expense ratio (TER), but this is often misleading with respect to total cost of ownership as the definition of TER can vary and can neglect a number of internal and external expenses Instead, investors should look at the total cost of ownership detailed below: Ongoing Charges Portfolio Trading and + Transaction + post-trade = Costs costs Total Cost of Ownership Management fees Administration fees Index license fee Custody Rebalancing costs Swap fee Securities lending fee Bid/ask spread Trading fees Reoccurring brokerage/platform fees
Commodities as an asset class
We consume commodities daily
Rationale for investing in commodities Although there are risks to investing in commodities, there are also many benefits: DIVERSIFICATION BENEFITS POSITVE RELATIONSHIP WITH INFLATION BENEFITS OF ECONOMIC GROWTH IN EMERGING MARKETS Due to historical longrun low correlation to traditional equity and bond benchmarks Historically, during period of high and unexpected inflation, commodities have often performed better Rising demand from rapidly industrialising economies are pushing commodity prices higher
Diversification properties of commodities
Strong links between commodity prices and inflation
Rising wealth is likely to drive structural increase in commodity demand *2012 data shown is the most recent statistical data available from the World Bank as at 01 September 2015.
Access to Commodities through Commodity ETPs Commodity ETPs offer a cost-effective and convenient solution to investors wanting to access commodity returns without ever having to take physical delivery. Single Commodity ETCs Commodity Baskets
Foreign exchange as an asset class
Foreign exchange: an all weather option? Alternative Asset Traded 24 hrs a day, Sun-Fri (GMT) Most liquid market globally Portfolio Diversification Low correlation with traditional asset classes
Understanding currency risk Investors often neglect the impact of currency risk on their investments Investments abroad Buying a foreign retirement Owning shares in a us-listed company Commodities priced in us Dollars
Currency exposure Currency fluctuations can both positively and negatively affect the returns of an underlying investment Breakdown of the returns of a US equity holding from the perspective of a UK investor 30% 20% US Equities (Local terms) FX Returns for a GBP-Based investor long of the USD 10% 0% -10% -20% -30% -40% 41882 41152 40421 39691 38960 38230 37499 36769 42247 41517 40786 40056 39325 38595 37864 37134 Currency ETPs and Currency Hedged ETPs can help protect investors against currency depreciations, whilst diversifying portfolios
Access to Currencies through Currency ETPs Currency ETPs offer ease of access to investors interested in gaining or managing currency exposure. Currency Hedged ETPs Single Currency ETCs Currency Baskets
Conclusion
Conclusion Learning outcomes and next steps ETPs are designed to replicate the return of an underlying benchmark or asset, with the easy access and tradability of a share ETPs are flexible, cost effective tools to help build diversified portfolios Commodities and currencies bring potential diversification benefits to multi-asset portfolios Due diligence and understanding risk factors associated with a particular product are important before investing in any type of ETP For more information about ETPs please visit: www.etpedia.co.uk www.etpedia.com
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