New research tools to enhance ETF selection rigour

Michael Turner

Michael Turner

With the available array of investment opportunity in the ETF landscape broadening, AltaVista Research has released more functional tools to enhance ETF selection and for advisors to more readily grasp the underlying investment exposures.

“We’ve introduced these tools to the Australian marketplace, to specifically enhance the process of selecting the most appropriate ETF for the required investment exposure.” The beauty of ETFs is the transparency of their underlying assets and as a consequence, you can and should know much more about those underlying assets and, in particular, how ETFs from the same peer groups actually compare. The new tools also assist with global asset allocation decision making.

ETF selection is not as simple as it may so readily sound. Whilst many ETFs have similar sounding names and asset sector exposures, only a handful of ETFs are track the same index. The vast majority of ETFs are most definitely not “the same”. Of the 33 pure Australian equities exposure ETFs under our coverage, only 6 use the same benchmark. Perhaps surprisingly, none from the ASX 200 peer group use the same Index. That leaves 27 ETFs that require granular examination and testing at constituent level. For Australian Fixed Income, 2 of the 10 Fixed Income ETFs and none of the 41 Global equities exposure ETFs under our research coverage mirror the same benchmark. No Emerging Market ETF uses the same benchmark.

Of note also is the development of ‘peer groups’. There are now 9 Dividend focussed ETFs and yet there are 25 ETFs under coverage alone that are expected to provide 2016E Unfranked Yield of greater than 5.0% with one as high as 6.4% Unfranked at 8.2% Franked.

“We therefore argue very strongly that as very little product replication, in its purest sense, exists in the Australian ETF market, investment decisions using ETFs require greater examination and knowledge of the resulting investment exposure. Clients deserve to benefit from greater ETF selection rigour and that’s what these tools set out to further enhance for our clients.”

The implication for advisors and Dealer Groups alike is that better investment decisions can be made. Having 1, 2 or 3 approved issuers or having a very small selection from each peer grouping or asset class is, in our view, insufficient. More effective use of ETFs will come about when advisors can select from a more diverse universe of ETFs from all issuers and where they can readily identify which ETF provides the most appropriate investment exposure for the specific needs of the client.

“We contend these tools further allow for the better testing, setting and / or re-engineering of APL’s for Dealer Groups. Often, ETF APLs are still too simplistic in nature and nowhere near broad enough to meaningfully allow ready and practical use at advisor level.”

The tools made available provide greater clarity around stock overlap between ETFs and identify individual stock exposures. Alternate funds based on investment exposures and readily identifiable as are key valuation metrics across global markets.

“It’s all about having greater knowledge and flexibility of that knowledge of the underlying investment exposure. That drives better client outcomes – a goal we certainly aim for.”

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