ETF of ETFs, benefits of a diversified portfolio

A ETF Portfolio allows clients to delegate the asset allocation to professional investment committee at highly competitive costs The main industry trends explains by Giangrande from Deutsche AWM

In Italy more and more investors focus on passive investments such as ETFs. Furthermore, a lot of the Italian investors show an increasing demand for multi asset products underpinned by a remarkable track record history. For this reason Deutsche AWM has recently launched in Italy new multi asset db x-trackers ETFs that replicate a diversified portfolio of ETFs investing in various asset classes.
Lmf International asked Mauro Giangrande, Head of Passive Distribution Southern Europe, Deutsche AWM, to explain the main industry trends.

Giangrande, why are ETF of ETFs a novelty for the Italian market?
Unlike a single ETF that follows passively its benchmark, a ETF Portfolio offers the possibility to delegate to a professional manager the selection, monitoring and the automatic rebalancing of ETFs in the portfolio, with transparent and efficient costs. The assumption that inspires the entire asset allocation process is based on the belief that it is possible to generate excess return over its main market benchmark through exposure to systematic risk factors, such as the size of the company or the “value”, in other words a strategy that focuses on companies undervalued by the market. The allocation process seeks to systematically reduce the weight of relatively expensive asset classes, favouring undervalued investments. We launched the first ETF of its kind for the Italian market, the db x-trackers Portfolio Total Return ETF, which anyhow has a track record of seven years. It allows clients to delegate the asset allocation to professional investment committee at highly competitive costs.

To which investors are they suitable?
The typical customer is the single investor, often self-directed, who knows and appreciates the characteristics of index funds listed on the stock market, but at the same time appreciates the ability to delegate the portfolio of ETFs to a professional manager. The db x-trackers Portfolio, which we recently launched in Italy, however, has attracted much interest in Germany also among wealth managers and independent financial advisors, the same target we want to achieve in Italy especially in the light of MIFID.

What would European ETF investors like to see more of?
According to a Survey we made with Etf.com and BBH, Sector ETFs led the wish list, chosen by almost half of respondents. Nearly 40% indicated there was a need for more smart beta products and roughly one third wanted to see more multi-asset class ETFs. The active, core equity and fixed-income categories also had a significant presence on investors’ radar, with each appealing to between 20% and 32% of respondents. The strategic beta space has been one of the hot spots in the European ETF space, exhibiting rapid growth, and 41% of investors plan to increase their allocations to such strategies.

Why is “factor investing” (also categorised as strategic beta) popular?
The topic of factor investing is becoming more and more important to issuers and investors alike. Indeed, Morningstar analysts already count 673 ETFs globally that can be categorised as ‘factor investing’ or ‘strategic beta’. The total volume of these funds is 396 billion US dollars, and the figure is growing significantly.

How do investors select ETFs?
Investors continue to see total expense ratio as the most important factor in their ETF selection process, followed by tracking difference and the ETF issuer. A sizable portion of investors had other factors that were most important to them but not included in the choices presented, like size, index and Sharpe ratio, among others.

Which are the prospect of Smart beta products in Europe?
According to a survey, roughly one third of investors (33%) believe the greatest benefit of smart beta products is the potential to deliver higher returns. Another 22% believe that smart beta products can deliver returns with less risk than market cap weighted portfolios and 21% believe the main strength of smart beta is the ability to deliver increased diversification. However, correlation and diversification are closely linked. If you combine the investors who believe smart beta’s primary benefit is increasing diversification with those who believe low correlations are the greatest benefit, that works out to 38% of the respondents, surpassing those who most appreciate the potential for higher returns.