Thematic ETFs: accurate predictors of the future or false prophets?

Artificial intelligence, orphan drugs and battery value-chains are just some of the attention-grabbing themes tracked by exchange traded funds launched this year. These join established themes such as robotics and water strategies. ETFs have become popular, but evaluating them and integrating them into an existing portfolio can be problematic.

Active funds fail to keep pace with passive fee cost cuts

Despite active managed equity funds seeing their fees fall by around 20% over the past five years, they have failed to keep pace with the rate of the fall in passive investment fund fees: with index funds and exchange-traded funds (ETFs) cutting their charges by 28%.

According to research by Morningstar, in a paper titled ‘The Effects of the Retail Distribution Review on Fund Fees in the UK’, since 2013 fees for active equity funds were cut by an average of 18%, on an asset-weighted basis.

Why ETFs with a ‘style’ bias should come with a health warning

Over meaningful time periods, why do some share prices rise and others fall? The answer is far from straightforward, as there are various factors at play, but one of the main ways that fund managers try to gain an edge is through weighting up the fundamentals: cash flow, return on assets, and the intrinsic value of a business. Qualitative analysis is also carried out, such as considering the track record of the management team that is at the helm.    

ETF investors: don’t get caught out by the wrong domicile

The taxation of investments is a complex matter, but this shouldn’t stop investors from carrying out basic due diligence during the exchange traded fund (ETF) selection process to avoid unwelcome effects on returns.

UK investors have access to a wide array of ETFs listed on the London Stock Exchange. But being listed on the local UK exchange is no guarantee of tax efficiency. Some of these ETFs are listed in London just because it is the trading venue of choice for many international investors, so these ETFs may have been initially designed to suit the needs of non-UK investors.