ETF investing becomes more sophisticated for Asian investors

The complexity of financial markets has spawned a myriad of financial products, with markets trends ushering in the need for a more holistic approach to asset allocation

Investing in exchange-traded funds (ETFs) used to be pretty straightforward for Asian investors. Simply pick an index that fits into your investment goals and then buy the ETF that mirrors the index.

But the all-pervasive uncertainty and volatility endemic within financial markets over recent years calls for more innovative, creative and sophisticated ways of tapping traditional investment instruments, even ETFs.

Long gone are the days when ETF investors could simply select an ETF and sit back. The proliferation of markets and rapid explosion of investment opportunities means ETF investors need a well-planned and well-thought-out strategy for ETF investing.

Just thinking about market developments shines a light on the complexity. Apart from the plain vanilla ETFs, there are now smart-beta ETFs, thematic ETFs, sector and industry ETFs, style ETFs, actively managed ETFs, to name just a few types of ETFs that have emerged in recent years.

To successfully navigate this ocean of ETF products and strategies, investors can make hay from two sources: first, an ETF investment adviser, and second, an ETF model portfolio.

The ETF investment adviser is an expert who can identify the most suitable ETF that meets an investor’s investment goals and strategies. Ideally, the source of guidance would stem from a research firm backed up with tons of data and research as well as oodles of experience in passive investing. 

However, for those investors who lack the resources to hire advisors, turning to “ETF model portfolios” is an option. An ETF model portfolio is basically a guide or an investment solution prepared by a specialized research firm that provides a framework for asset allocation based on an investor’s investment objectives.

The idea behind using an ETF model portfolio is to save on the time and resources that investors would expend by preparing their ETF portfolios themselves.

This is where tapping the skills of an expert ETF investment advisor comes into play. In addition to providing investment advice, the ETF investment advisor can build the ETF model portfolio for their investor-client, in the process freeing the investor-client to focus on their overall investment strategy.

In response to these trends, asset managers increasingly understand that their value proposition is not always their stock-picking savvy or ability to construct an investment portfolio.

The increasing sophistication of ETF investing is actually part of a bigger trend as the financial service industry moves towards holistic wealth management and “goal-based” planning as well as a recognition that there is an increasing need for investors to turn over asset management to third-party strategists.

Another development in response to these trends is that US-based index provider and stock exchange operator Nasdaq has launched its ETF advisory solution business known as Nasdaq Investment Solutions (NIS). The business was built on the back of its acquisition of Dorsey Wright, a boutique investment research firm. As part of its business, Dorsey Wright creates model portfolios for trading baskets of ETFs, which are marketed to asset managers and financial advisers. Nasdaq also manages about US$1 billion in separately managed accounts.

“We’re combining businesses that we’ve created over the last five years into a singular focus where we have index licensing and delivery, we have adviser solution technology and research. On the technology side, we have a full front-end solution for financial advisers and retail investors,” says Robert Hughes, vice-president for global information services at Nasdaq.

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