The top panel at ETF Express’s inaugural ETF event etfLIVE in May will see AJ Bell’s Matt Brennan (pictured) talking about how the firm came to use ETFs to fulfil their clients’ needs.
AJ Bell has some GBP380 million across its funds, in eight multi-strategy funds, predominantly invested through ETFs.
“Our end users are always retail but we sell direct to retail but also through financial advisers,” Brennan explains.
“The big focus for us when talking to financial advisers, where it becomes a sophisticated conversation, not just about costs but also about tracking indices, taxes and so on.”
Costs are what has steered AJ Bell towards ETFs. “If you look at how this was done with active funds, there was typically a cost of 1-2 per cent to build a portfolio with two to three hundred equities and bonds and you had produced essentially a passive portfolio,” Brennan says.
“ETFs allow us to deliver similar outcomes but at 0.5 per cent, including platform costs. It makes a huge difference when the typical balanced portfolio can achieve 5 per cent, if you are doing well. At the moment, fees have a big impact.”
Brennan notes that some financial advisers only care about the headline costs but there are a few who dig deeper and want to know, particularly post MiFID II, what are the dealing and transaction costs on an ETF portfolio, and that too has changed over the last few years.
“Three years ago an ETF typically cost 0.5-0.8 per cent as a headline cost and now it’s as low as 0.04 per cent so headline costs have got so low that people care about other costs such as stamp duty or bid/ask spread.”
Synthetic ETFs have not proved popular with financial advisers or retail investors. “It’s a bit of a demon word in the UK,” Brennan says. “In reality if you look under the hood it doesn’t really make much difference but any adviser that is in front of a client and can’t explain how a synthetic works then we aren’t comfortable with that.”
As a result, AJ Bell does not use synthetic ETFs at the moment. “We can see the benefits but we have investor education to work on before we use a synthetic as we want to give advisers and investors a chance to understand.”
The other big issue that comes up with ETF usage is a fear that they are potential sources of huge systemic risk in the capital markets.
Brennan says: “I play active manager bingo every time I hear certain comments such as ‘ETFs are getting too big’ or ‘this is a market for active investment’. We hear this all the time and what’s been interesting is that at the beginning of our journey it was hard to dispel that but in the fourth quarter of 2018, we outperformed many active managers who were following the same strategies as us.
“On systemic risk, the argument I use is that the liquidity of an ETF is the underlying but with active it’s much more dynamic. Look at the Woodford situation – 20 per cent of the asset comes out and all the liquid stuff gets sold and you have an illiquid portfolio.”
The firm has looked at launching its own ETFs. “The AJ Bell motto is simple, transparent, low cost so core beta ETFs are perfect for us but the starting cost is around GBP100,000 so we prefer to work with ETF providers in conjunction with us, such as Invesco with its hedged US corporate bond ETF, which we helped design.”
A couple more ETFs that AJ Bell has worked on are in the pipeline.
“Typically an ETF provider bringing a new ETF to market needs GBP20-30 million so now we can have these conversations and spot where there are gaps in the market and where providers are over-charging and use the power of our assets.”