Exchange Traded Funds (ETFs) - ETA

Hi!

Exchange Traded Funds (ETFs) are described in the FT Guide by David Stevenson, as “an investing revolution” that has literally swept the States. “Challenging modern investment principles such as individual stock selection…By tracking an index, focusing on themes and sectors and helping assess risk they are fast becoming a key investment vehicle.”

Asset class investing is probably one of the most significant growth opportunities in the financial sector. Numerous financial organisations including Vanguard have sung their praises in recent years.

The question for Tom and the Team is, when will ETFs be available to MF investors, what are the costs likely to be and what choice will there be in relation to sectors etc? I am aware that take-up of the Accessible Portfolios has gone ballistic and there are currently massive demands on the team, so a ballpark ETA would be great.

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Hey @Curious1

Great points on ETFs.

Are you referring to MF packaging its portfolios into ETFs, or MF offering ETFs in its portfolios?

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Ultimately, both angles really. I simply love the idea of say, if you were bullish on the Telecoms sector, instead of buying British Telecom, you take on Vodafone and TalkTalk etc as well. Just reducing the volatility and de-risking hanging your hat on one share.

Ideally, when you are bullish on the UK economy as a whole, say if the Brexit effect was seen as behind us, a sectoral ETF play taking in 3i, John Laing Group etc might seem a great idea.

Or, if you were bullish on the housing sector, an ETF including, Barratts, Berkeley, Bellway, Persimmon etc.

Initially, I would be interested in MF offering ETF’s in its Portfolios, but I would really want to choose the sectors ideally.

For the future, once MF shares can ultimately be traded, and it is fully acknowledged as a shooting star in the financial sector, I imagine that there will be a more than few institutions wanting to create an ETF “cocktail,” starting with MF and then adding a bit of Nutmeg, Monzo etc.

If the shares are not formally traded, there is an argument for including in an ETF, the shares of the backing organisations where they are available.

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I do think that, regardless of the path chosen here, since ETFs are a very popular product, MarketsFlow will probably have to do something with them to ensure overall success.

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Personally I feel that the bigger opportunity - at least initially - is to repackage MF as an ETF and offer it as such to the market.

With its comparatively low rates versus high returns it can really differentiate itself from most ETFs which in essence are nothing more than a passively managed basket of relatively few stocks - hence why they aim for beta returns. MF on the other hand can offer higher returns potentially, at slightly higher costs, and differentiate as its actively managed.

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Martijn,

Great to be in contact with you & what you say is extremely interesting.

Really what you are suggesting is something of a derivation of an ETF - perhaps an Exchange Traded Dynamically Managed Fund (ETDMF). It looks prospectively very exciting. Have you run it past Tom yet - I am sure he will be interested in exploring this further?

I assume you don’t see the enhanced opportunity as working as well, if MF simply developed a managed ETF, spun it into the market, but also carried on selling the MF Platform in the marketplace as it does now. As you know there is an evangelical zeal about Tom’s delivery of the Accessible Portfolios to the mass market & I am sure he would want to keep this in place.

In your position, could I ask whether you would be interested in introducing MF packaged in an ETF, to the market? I would hazard a guess you might have an affirmative view on this. What you are putting forward looks like a very astute strategic option.

Regards,

Tony

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I also agree with @Martijn that ETFs offer a huge potential to MF and for other players to serve MF ETFs to their clients.

This was always the idea that ultimately MF Portfolios would be rolled out as ETFs so that other Asset Managers and allocators would also have access to it.

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At the risk of merging discussion threads, is it worth having a chat with someone like Freetrade in advance of creating ETFs? They are looking to expand aggressively and replicate the Robin Hood model. If you could get in early with them, then you can add the ETFs to their available tradeable asset universe immediately. This would provide access to a lot of people at the beginning of their investing path as well as FinTech adopters.

Despite Freetrade predominantly offering the opportunity to buy shares, they also offer ETFs and there are a lot of users on the forum that are interested in only buying into ETFs or using them for a significant portion of their portfolio.

Would there potentially be issues with adding an ETF that uses your options strategy to an ISA?

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JamesWhitt

Unfortunately an ETF that utilised options in any way, would be seen by the ISA police as a Trojan Horse, and prevented from becoming part of any ISA content.

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True, but there is an ISA option of both MF portfolios that could be leveraged on FreeTrade. Their performance isn’t perhaps as stellar as the non-ISA version that does use options, but they are good nonetheless and can be a pathway into the other MF ETFs that use options.

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@Curious1 I thought this may be the case, so MF would need to work with platform providers to ensure that such an ETF cannot be held in an ISA, and clients should be directed to for MF’s ISA version instead, which is compliant as @Martijn suggests.

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