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RDR aids ETF growth in the UK

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The Retail Distribution Review has aided the recent rapid growth in ETF usage in the UK says Hector McNeil (pictured), Co-CEO, WisdomTree Europe. "Increasingly with the move to fee-based models, the alignment of the wealth adviser and investors is more apparent," he says. "It's now a much more symbiotic structure and basically the structure that they have in the US, where ETFs have taken off."

ETFs are cost effective, transparent and liquid, McNeil says, allowing a blend in asset allocation of active and passive funds.

"The majority of products are Delta one using either asset allocation or a core satellite type of approach, so tactically, they might think China is going to rebound in the medium term or that they need to hedge against Greece."

In the UK, WisdomTree Europe has been part of the initiative to work with other leading ETF providers ETF Securities and Lyxor, on education on the use of Short and Leveraged ETFs. "Most wealth advisers don't use Short and Leveraged, but usage is growing," McNeil says. "But in each of the main wealth firms there is probably a more sophisticated user or group of users who use them as derivatives light instead of futures and options where they want to express an idea."

WisdomTree Europe offers ETFs through two different platforms, the WisdomTree UCITS ETFs platform and the Boost Short and Leveraged platform. WisdomTree bought Boost in 2014, and the firm has seen a 300 per cent growth in assets, year to date, from USD170 million to GBP650 million, reflecting the increasing use of ETFs in Europe. McNeil estimates that currently roughly 4 to 5 per cent of wealth adviser assets are in ETFs and confidently predicts that it will grow to 30 per cent over the next five years. 

The smart beta approach is increasingly resonating with wealth managers who are increasingly using ETFs for plain beta, McNeil says. "The plain beta battle has been won by ETFs by now. People are realising that if you want to express a low cost beta solution, an ETF wrapper is a great way to access better risk adjusted returns to the market."

McNeil believes that the decision on smart beta is different, because managers are looking for returns after fees with smart beta rather than just the lowest cost as is the case with plain beta. They are not so concerned about management fees when they are looking for diversification or replacing an active strategy.

"Smart beta is challenging that world," he says. "There is a grey area between passive and active management now and it is starting to spread across the UK. Our WisdomTree strategies have been around since 2007 or 2008 so have significant live track records but most products are new so they are relying on back tested data which should be viewed with a pinch of salt."

Another trend has been that asset managers use ETFs to achieve a broader geographical spread in their portfolios. "You tend to find that wealth advisers believe they can differentiate in their local markets using stock picking or active management, but use ETFs for foreign markets where they can't easily add value.

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