It is a way of keeping risk and costs low, while allowing better diversification and exposure to slightly more esoteric asset classes or emerging markets.
As Cowen puts it: "Having core beta allows something of a core-satellite approach, enabling us to use active managers with more focused and stronger factor biases.
"Such funds, such as concentrated deep value or high growth and their underlying stocks, may trade at a discount as they are too ‘non-core’ for many.”
Seager-Scott says there are several ways of creating a portfolio with a core holding or set of holdings, with funds added around it. By moving further down the passive portfolio spectrum, some investors may choose to have a core of active funds looking to add alpha in a particular market.
However, they could supplement that with passive/ETF exposure that can be used for portfolio liquidity or to help express more tactical views.
He adds: "Another step along the spectrum might be using a core and satellite approach with a core of passive funds and minority of active funds.
"Often, this approach aims to take advantage of broad characteristics of risk assets (market or beta exposure) with relatively low costs using passive exposures.
"It complements this with active funds that tend to be a little more aggressive and unconstrained to provide an alpha ‘kicker’ without exposing the rest of the portfolio to what can be returns that deviate significantly from the benchmark."
Why it might work for clients
Vanguard's Hsu explains: "An ESG ETF enables investors to construct these kind of balanced portfolios, in a manner that also aligns with investors’ values. Physically replicated ETFs also have the advantage of being simple and transparent.
"Investors are able to know at any time what their portfolio is invested in, and importantly, via exclusionary screening, which companies they are not invested in.
"While fund companies continue to innovate, there are already a wide choice of ESG investment vehicles out there in the market, and investors can look to find products that best suit their needs and values.”
The table below from Hargreaves Lansdown shows the popularity of ETFs. Over October, the following were top sellers on the DIY platform (listed alphabetically).
| Top ETFs bought on Hargreaves Lansdown platform: October 2021 (by net buy, alphabetical) |
| HSBC ETFs Plc MSCI World ETF GBP |
| HSBC ETFs plc S&P 500 ETF USD |
Invesco Markets II Plc Invesco Elwood Global Blockchain Ucits ETF (Acc) |
| Invesco Markets III PLC EQQQ NASDAQ 100 UCITS ETF |
| iShares II plc Global Clean Energy UCITS ETF (Dist) |
| iShares III plc Core MSCI World (Acc) |
| iShares Physical Metals plc Physical Gold ETC |
| iShares Physical Metals plc Physical Silver ETC |
| iShares plc Core FTSE 100 UCITS ETF (Dist) |
| iShares plc S&P 500 UCITS ETF (Dist) |
iShares V plc S&P Commodity Producers Oil & Gas UCITS ETF USD Ac |
| Legal & General ETF Hydrogen Economy UCITS ETF USD (GBP) |
| Legal & General UCITS ETF Cyber Security UCITS(GBP) |
| Vanguard Funds Plc FTSE All World High Dividend Yield UCITS ETF |
| Vanguard Funds plc FTSE All-World UCITS ETF (USD) Accumulating |
Vanguard Funds plc FTSE All-World UCITS ETF (USD) Distributing - GBP |
| Vanguard Funds plc S&P 500 UCITS ETF USD ACC (GBP) |
| Vanguard Funds plc S&P 500 UCITS ETF USD(GBP) |
| WisdomTree Carbon ETC |
| WisdomTree S&P 500 VIX Short-Term Futures 2.25x Daily Lev |
Moreover, with more structured ETFs being launched that track the performance of more esoteric asset classes, or the performance of a synthetic basket of stocks that mirrors the performance of other asset classes such as commodities or cryptocurrencies, it might also be possible to add diversification from these products.
Hsu comments: “It’s certainly possible to package a wide variety of different exposures into an ETF vehicle. However, the key benefit of ETFs is that they enable investors to put together low-cost portfolios in a transparent, democratically priced manner.
