A recent report from BlackRock, which runs ETF and Exchange Traded Products (ETP) provider iShares, says the vehicles went from strength to strength in 2010 as IFAs looked to step in line with the Retail Distribution Review (RDR).
Harry Katz, who advises at Norwest Consultants, believes the vehicles do not offer good value for money.
"You have all these providers pushing ETFs but as an IFA I can’t buy them directly," he said.
"I have to get them from a wrap which is going to charge. By the time an adviser adds their charge the client might as well invest in a tracker investment trust. The low-cost nature is illusionary."
Chris Spear, managing director of Spear Financial, shares Katz’s reservations.
"I don’t trust ETFs. I don’t think they have been tested when there is high demand and people have been faced with liquidity issues when they try to withdraw their money. I would rather invest in a tracker fund," he said.
BlackRock stated that ETF/ETP assets increased 49 per cent in 2010 to $93.4bn. The number of ETF/ETP products also went up over the year, from 293 in 2009 to 520 at the end of 2010.
The year saw 11 new providers bring exchange traded investments to the UK market.
BlackRock said the RDR is driving this interest, and issued a statement saying: "An added impetus causing advisers in the United Kingdom to embrace ETFs is the Financial Service Authority’s (FSA’s) RDR."
"ETFs are RDR-ready and fit into the new adviser charging model proposed by the FSA. As such, we have seen an increasing number of requests for information on ETFs."
Top 10 UK ETFs/ETPs by assets under managment
| Name | AUM ($m) |
| iShares S&P 500 | 7,906 |
| iShares MSCI Emerging Markets | 6,822 |
| ETFS Physical Gold | 5,963 |
| iShares FTSE 100 | 5,962 |
| GBS Bullion Securities | 5,567 |
| iShares MSCI World | 3,455 |
| iShare MSCI AC Far East ex-Japan | 2,264 |
| iShares MSCI Japan | 2,082 |
| iShares Markit iBoxx Sterling Corporate Bond | 1,789 |
| iShares MSCI North America | 1,778 |
Source: BlackRock
According to BlackRock’s data, the top-three ETFs/ETPs by assets under management (AUM) are iShares S&P 500, iShares MSCI Emerging Markets and ETFS Physical Gold.
Performance of ETFs over 3-yrs
Source: Financial Express Analytics
Over the last three years ETFS Physical Gold has returned 44.4 per cent to investors, while iShares MSCI Emerging Markets had 9.7 per cent growth. iShares S&P 500 returned seven per cent over the period.
iShares MSCI Emerging Markets saw the highest inflows over the year with $2.69bn, followed by DB x-trackers MSCI Emerging Market TRN Index ETF with $1.7bn and iShares DAX with $1.53bn.
BlackRock stated that ETF assets will continue to grow as they have done year-on-year since their inception into the London Stock Exchange in April 2000. The fund provider expects an increase of 20 to 30 per cent in 2011.
"The landscape will continue to evolve during 2011 and beyond as we see more products from traditional active asset managers and alternative asset class exposures becoming available to mainstream retail and institutional investors," said a report from the fund provider.
It also said that investors are attracted by the simplicity of ETFs: "ETFs have been embraced because we are in a back-to-basic environment where they provide transparency on the portfolio’s holdings, offer daily creation/redemption, have multiple marketmakers, and have real-time indicative NAVs."
However, Katz disagrees, saying he is more comfortable buying managed ETFs. "They are not simple. They are a long way from being simple and now even the regulator agrees," he added.
"If I could buy them directly then I would look at them more favourably. I would consider buying through someone like Evercore Wealth Management and let them manage my ETF for me."
"Not many people realise you can buy managed ETFs."
Spear says he prefers to stick to what he knows and ETFs don’t fill him with a lot of confidence.
"[Thames River multi-manager] Rob Burdett said something about the current economic situation that made a lot of sense and that was that he was 'keeping things vanilla'."
"When it comes to making an investment decision on ETFs then I too would rather keep things vanilla," he finished.