Apart from additional liquidity and real-time pricing, Mark Fitzgerald, head of product for Europe at Vanguard, points out the ability to trade ETFs on an exchange means they offer investors the same trading flexibility offered by stocks, including limit orders, market orders, stop-loss orders, and the abilities to purchase on margin and to sell short.
He adds: “The ability to sell ETFs short enables investors to hedge their portfolio, or express a negative view on a sector or an entire market, albeit at a cost. As a result, investors may find that they have greater freedom to implement short-term trades using ETFs.”
Howie Li, executive director and co-head of ETF Securities’ Canvas platform, says: “It’s important investors are clear that in terms of underlying investment exposure, tracker mutual funds and ETFs are the same where the underlying index or strategy is the same. In Europe, both vehicles are generally structured as a Ucits and the investment portfolio is managed in the same way.
“What ETFs mainly do is provide features [such as] an additional layer of liquidity [intraday compared with a mutual fund] and transparency of holdings. This intraday liquidity is becoming more important to investors who want to know the exact cost and want precision.”
Mr Fitzgerald adds ETPs offer a greater number of unique benchmarks to track, many of which are more specialised than traditional benchmarks. This has contributed to the evolution of passive products including the development of smart beta or fundamental ETF strategies.
He explains: “Investors should note that the indexing concept has expanded greatly to include a large number of non-traditional, non-market-cap-weighted indexes. Such indices represent rules-based active strategies that attempt to outperform traditional market-cap-weighted benchmarks in some way, including by higher returns or lower volatility.
