In a recent interview with ETF Stream, our head of portfolio management Iain Barnes talked about how we use ETFs in our portfolios.
How much of your portfolio is made-up of ETFs and index funds?
Our starting point is for 100% of our investments to be made through ETFs and passive funds. But we never say never – if the right active opportunity presents itself, we would consider it. It’s most likely that this would be as a defensive move, to avoid an undesired exposure of a given index, rather than because of a strong belief in a particular manager’s inherent skill to deliver future outperformance at a particular point in time.
When did you start investing in ETFs?
We have invested this way from the outset; ETFs and passive investments were an integral part of our thinking when we started Netwealth four years ago. Our investment process and choices are designed in sympathy with how we operate as a firm – which demands a high-quality offering delivered efficiently. Before joining Netwealth, I had invested in ETFs alongside actively-managed strategies since the mid-2000s.
Which asset classes do you tend to invest in through ETFs?
Chiefly, our long-term strategic mix of assets consists of a globally diversified blend of domestic, developed and emerging market equities, government and corporate bonds, and cash. Each of these displays distinguishing and valuable characteristics. We also have the scope to invest in commodities and other alternative asset classes so long as they meet our pre-requisite of daily liquidity, but have not yet found a compelling reason to do so.
Which areas would you avoid?
Unsurprisingly, we’re not at all keen on 3x leveraged inverse oil ETFs, or typically anything with an esoteric ring to it. Our clients appreciate that their portfolios have 100% daily liquidity, that we don’t use leverage and we also tend to avoid funds which are synthetic-backed.
What is your methodology for selecting ETFs?
You have to look closely at the packaging. We consider several key criteria when selecting the specific passive fund or ETF to invest in for each asset class, including: