BUILDING PORTFOLIOS WITH ETFs

Finish the ETFs course with module 5 to learn about the different types of ETFs to that could be implemented within a portfolio, with a particular focus on UCITS ETFs.

1. Deepening liquidity market

There are a few reasons for a deepening liquidity market, including:

• Trading volumes increasing due to the accelerated growth of ETFs.
• Trading costs (bid/ask spreads) reducing due to increased ETF usage and an improving European market structure.
• Ecosystem developments such as ETF lending, ETF options markets, MiFID II, ETFs displacing derivatives and more centralized clearing.

2. Unique features and exposures

The European ETF platforms provide investors with a wide variety of ETF choices. The UCITS directives allow for certain flexibilities in portfolios such as multiple share classes and variable income treatment. This results in both accumulating (meaning it can provide operational efficiency to portfolios) and distributing ETF options.

Additionally, certain exposures are available in the UCITS market which are not available in the U.S., such as European sectors and country government bond funds.

Latin American investors could also benefit from a broader range of megatrend ETFs through investing in UCITS, which provide access to new parts of the market such as:

• Technological breakthroughs (e.g. robotics)
• Demographics and social change (e.g. genetics)
• Rapid urbanization (e.g. infrastructure)
• Climate change and resource scarcity (e.g. self-driving cars)
• Emerging wealth (e.g. digital economies)

RETHINK AN ETF INVESTING APPROACH

Whether investing occurs through UCITS ETFs, iShares Core ETFs or other assets, the key is balance. Using a ‘Core-Satellite’ approach (think of planets revolving around the sun) is one way to create a portfolio that is both balanced and return-seeking.

The ‘Core’– think of the sun at the center – is typically made up of long-term, relatively lower risk investments. The ‘Satellite’ of the portfolio – i.e. the planets – is made up of potentially higher risk investments that can maximize returns or build greater diversity.

The core of a strategy could include a fixed-income ETF, which may be lower in return but should help provide more stable returns within the portfolio. For the ‘satellite’, investors could consider selecting sectors that may be performing well, or even just investing in single stocks. This has the potential to supplement the core with investments with higher return.

Investing this way can give a truly diversified portfolio that is at the same time low cost, efficient, and potentially providing more stable market returns, while also providing potentially higher returns from more niche, select investments. Keep in mind that ETFs can span across both the core and satellite aspects of the portfolio.

THINK DIFFERENTLY

ETFs can be an effective tool to optimize portfolios, providing key benefits such as diversification, the ability to maintain income, minimize volatility and ultimately, maximize the value of the investment. There are a broad range of ETFs that can be explored depending on the clients’ investment objectives.