Are ETFs useful in portfolios? Asset owners share their views | Event Highlights

Divergent views on the suitability of exchange-traded funds (ETFs) in portfolios emerged during a lively panel discussion at AsianInvestor’s Asia Investment Summit in Hong Kong on May 23.

The roundtable saw three asset owners – a pension fund, an insurer and an endowment – ​​explore the usefulness of ETFs in portfolios.

Kevin Liem

Masan Capital

“The topic of assets versus liabilities has definitely come up again in recent months, mainly because over the past year many [outperformers in the S&P 500] came from a handful of stocks,” said Kevin Liem, managing director of family office manager Masan Capital and treasurer of Hong Kong Baptist University (HKBU).

Part of Liem’s ​​duties at HKBU includes chairing the university’s endowment and pension fund. As such, he views ETFs from two different perspectives.

“As an institutional investor, ETFs are very efficient from a benchmark and reporting perspective. But of course, when you talk to active managers, it really depends on whether they overweight or underweight the Magnificent Seven, because based on [this] different experience, they will tell you very different things,” Liem said, referring to the top seven U.S. tech stocks that have risen significantly relative to the rest of the market over the past year.

“For family offices, we do a lot of trading, and ETFs and indices are very effective vehicles for getting in and out of an asset class, because of the liquidity,” Liem said.

ETF vehicles are both good for hedging and for buying when markets fall, he explained. And even when a market hits a low point, it is possible to sell short, that is, to sell or write a put option on a security, instead of buying a swap position in species.

TOO EXPENSIVE

For Dutch pension manager APG Asset Management, ETFs appear to have very little importance, according to Thijs Aaten, managing director for Asia at APG Asset Management.

Thijs Aaten

APG

“ETFs are too expensive for us, but a lot of it depends on our size,” Aaten said, referring to APG’s total assets under management (AUM) of 569 billion euros ($617 billion). in December 2023. “We can better negotiate offers. I don’t know where the securities lending revenue in ETFs goes, so there’s some sort of hidden cost to them as well.

Sometimes ETFs have better liquidity than the underlying market, which can for example be the case for credit portfolios, Aaten explained. And if investors want to gain exposure quickly, they can first use an ETF and then potentially swap for a physical property to avoid paying fees in the long run.

“If I hold the securities, there are no fees, so you use ETFs to get in and then request a physical exchange,” Aaten said.

Read also : APG leverages private assets to manage portfolio volatility

Mei Mei Zheng

Transamerica Life

Meimei Zheng, associate director and investment strategist at Transamerica Life (Bermuda) Ltd., explained that the insurer does not currently use ETFs for its stock portfolio, but that stance may soon change.

“I think in the future, we can explore the possibilities of considering ETFs and index-linked investment strategies, within the framework of active or passive investment,” Zheng said.

SHORT-TERM STRATEGIES

Meanwhile, institutional investors do use ETFs for their short-term tactical asset allocation and portfolio rebalancing, according to Sue Lee, director and head of APAC index investing strategy at S&P Dow Jones Indices.

Sue Lee

S&P Dow Jones Indices

“Particularly in terms of portfolio diversification, we have recently seen a rise in options-based strategies. And passive strategies have also gathered a lot of assets in this space,” Lee said.

As with index options, some ETF options have attracted significant trading volume. While ETF options are settled in the American style with early exercise rights and in shares of the underlying security; Index options are settled in European style and in cash.

“We see our clients among intermediaries and institutional investors using the index approach in different ways,” Lee said.

An example of the middle side is the core model portfolio, in which advisors operate diversified ETFs and a large order of the same security is bought or sold by institutional or other large investors.

“Based on the client’s goal, situation and preferences, it builds a well-diversified multi-asset portfolio to achieve its goal,” Lee said.

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