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Exchange-Traded funds | Module 5

BUILDING PORTFOLIOS WITH ETFs

Finish the ETFs course with module 5 to learn about the different types of ETFs to that could be implemented within a portfolio, with a particular focus on UCITS ETFs.

WHY CONSIDER IMPLEMENTING ETFs?
ETFs provide a low cost, tax efficient way to diversify portfolios. Skilled financial advisors often consider several different ways to improve portfolios, from reducing risk to potentially maximizing returns.
Why consider implementing ETFs

HOW ETFs CAN HELP OPTIMIZE AN INVESTMENT PORTFOLIO

Learn about how ETFs can help optimize a portfolio.

1) Diversify

Build a strong foundation in the portfolio with iShares Core ETFs. ETFs help to diversify a portfolio by providing broad exposure across major asset classes, at a low-cost.

2) Maintain income

Having easy access to cash is important for a rainy day. Choosing a fixed income ETF that holds bonds or other fixed income assets has the potential to provide steady returns in the case of an emergency or when funds are needed immediately.

3) Minimize volatility

Volatility sometimes drives investors to abandon their investment plans and attempt to time the markets, which may risk jeopardizing their long-term investment goals. There are ETFs that offer minimum volatility strategies, which may be appealing to financial professionals seeking to manage risk while also participating in the market on behalf of their clients.

4) Maximize value

Many investors get stuck investing locally, overexposing themselves to local market volatility. ETFs allow investors and financial professionals to go beyond the basics and access targeted exposures to different markets and assets.

PROS AND CONS OF ETFs

WHY CONSIDER IMPLEMENTING UCITS ETFs?

UCITS ETFs are products domiciled in European markets that are subject to the Undertakings for the Collective Investment in Transferable Securities regulation. The UCITS ETF industry and adoption among Latin American investors is rapidly growing due to the benefits they provide.
One benefit of UCITS ETFs is potential tax advantages.
Tax advantages
One benefit of UCITS ETFs is expanded liquidity.
Expanded liquidity
One benefit of UCITS ETFs is its unique features and exposures.
Unique features and exposures

1. Potential tax benefits

Taxes can be a complicated matter. In certain cases, UCITS ETFs offer potential tax benefits in comparison to U.S. domiciled funds, such as preferential withholding or estate tax rates for non-U.S. investors.

For example, investors who incur up to 30% withholding tax rate on distributions from U.S. domiciled ETFs are typically able to retain higher levels of income through Irish domiciled ETFs.

Note: tax withheld on the underlying exposure will fluctuate depending on the exposure, sometimes to the benefit of the Irish ETF.1

UCITS ETFs offer Latin American investors tax advantages

2. Deepening liquidity market

There are a few reasons for a deepening liquidity market, including:

  • Trading volumes increasing due to the accelerated growth of ETFs.
  • Trading costs (bid/ask spreads) reducing due to increased ETF usage and an improving European market structure.
  • Ecosystem developments such as ETF lending, ETF options markets, MiFID II, ETFs displacing derivatives and more centralized clearing.

3. Unique features and exposures

The European ETF platforms provide investors with a wide variety of ETF choices. The UCITS directives allow for certain flexibilities in portfolios such as multiple share classes and variable income treatment. This results in both accumulating (meaning it can provide both operational and tax efficiency to portfolios) and distributing ETF options.

Additionally, certain exposures are available in the UCITS market which are not available in the U.S., such as European sectors and country government bond funds.

Latin American investors could also benefit from a broader range of megatrend ETFs through investing in UCITS, which provide access to new parts of the market such as:

  • Technological breakthroughs (e.g. robotics)
  • Demographics and social change (e.g. genetics)
  • Rapid urbanization (e.g. infrastructure)
  • Climate change and resource scarcity (e.g. self-driving cars)
  • Emerging wealth (e.g. digital economies)

RETHINK AN ETF INVESTING APPROACH

Whether investing occurs through UCITS ETFs, iShares Core ETFs or other assets, the key is balance. Using a ‘Core-Satellite’ approach (think of planets revolving around the sun) is one way to create a portfolio that is both balanced and return-seeking.

The ‘Core’– think of the sun at the center – is typically made up of long-term, relatively lower risk investments. The ‘Satellite’ of the portfolio – i.e. the planets – is made up of potentially higher risk investments that can maximize returns or build greater diversity.

Use a ‘core-satellite’ approach to build a portfolio

The core of a strategy could include a fixed-income ETF, which may be lower in return but should help provide more stable returns within the portfolio. For the ‘satellite’, investors could consider selecting sectors that may be performing well, or even just investing in single stocks. This has the potential to supplement the core with investments with higher return.

Investing this way can give a truly diversified portfolio that is at the same time low cost, efficient, and potentially providing more stable market returns, while also providing potentially higher returns from more niche, select investments. Keep in mind that ETFs can span across both the core and satellite aspects of the portfolio.

THINK DIFFERENTLY

ETFs can be an effective tool to optimize portfolios, providing key benefits such as diversification, the ability to maintain income, minimize volatility and ultimately, maximize the value of the investment. There are a broad range of ETFs that can be explored depending on the clients’ investment objectives.

CONGRATULATIONS!
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