“The ETF secondary market can also provide a second layer of liquidity where if there are sufficient buyers and sellers of the ETF on the exchange then units of the ETF do not need to be created or redeemed (which means that underlying equities and bonds don’t need to be bought and sold), which can be particularly valuable in less liquid exposures.”
Amanda Rebello, head of passive distribution, UK & Ireland at Deutsche Asset Management agrees the most obvious difference is index mutual funds are not listed and therefore do not offer intra-day liquidity.
She says of ETFs: “That intra-day liquidity is important for some investors, and can come into its own in stressed or highly volatile environments – such as post referendum Brexit for example – where quick entry or exit to the market might be needed.”
But Pollyanna Harper, head of UK intermediaries sales at iShares insists liquidity is of less importance to a financial adviser as they are not going to be trading daily.
“However, if doomsday happens you can absolutely get out as soon as you want if you can access them on those types of platforms where they have the intraday liquidity,” she acknowledges.
“On the flip side, most advisers don’t want to have that option, they’re not going to suddenly jump into cash when a macro event happens. Most platforms will price them in the same way a mutual fund is priced, which means they are in parity with mutual funds, it makes it much more easy to understand and implement.”
Costs
Instead, she sees cost as the main distinction between the two types of passive product.
Ms Harper observes: “Seeing that passive investment vehicles have dropped in cost means the adviser can implement an ETF into a portfolio and reduce the overall cost to then keep the portfolio value down, maintaining their clients and potentially reducing their overall fee.
“If I’m looking at the cost of an ETF versus a mutual fund, the cost of an ETF is priced at its net asset value or thereabouts as close as possible, [and] then you would have the bid to offer spread.”
She continues: “With a mutual fund you’re looking at it being priced at NAV but then in some cases existing investors are going to be absorbing the trading costs, or there might be a dilution levy put in place so that’s almost like seeing an upfront charge on top of the TER [total expense ratio].”
