The AAM Approach To ETFs

The Rise of ETFs: What You Need to Know

Part Three: The AAM Approach to ETFs

Parts One and Two in this series outlined the reasons why so many investors are turning to passive strategies instead of actively managed funds, but also that there are several considerations and potential pitfalls when investing in ETFs. This instalment explains how AAM assists clients when we recommend the use of ETFs or index funds.

Our Model Portfolios

AAM has embraced the use of low-cost ETFs and include them in our model portfolios where we feel they are appropriate and available to our clients. However, there are investment sectors and asset classes where we feel that an active manager can justify the additional fees that they charge. In less efficient markets there may not be a suitable index for an ETF to track, or if there is one we might judge that it is not the best way for our clients to generate exposure to this sector or region.

Figure 3: AAM Advisory Investment Process

Figure 3 illustrates the process we follow to determine which funds to include in our model portfolios (which is explained in greater detail in our Investment Principles document).  Step 3 is where we assess individual funds, both active and passive.  We undertake quantitative fund analysis that includes examining risk, returns and fees but also we also employ qualitative fund analysis where we consider factors such as the fund’s organisational strength, the consistency of the fund’s investment strategy, asset size and asset growth.

We intend to ensure that when we do use actively managed funds, they have a mandate which is significantly different to the benchmark or index, which could otherwise be better tracked using a low-cost index tracker.  In less efficient markets and also in sectors which are different to the ‘headline’ indexes, it takes skill, time, application and patience to perform well and in these instances, we believe that active fees can be justified.

The AAM Passive Model Portfolios

For those clients who wish to invest solely in passive strategies, the Investment Research Team at AAM runs several passive model portfolios across different currencies and risk profiles.  These portfolios are constructed using the same methodology as our model portfolios except the investable universe is limited to passive funds.  Your AAM financial planner will talk you through the options and explain the AAM Passive portfolios to you.

As with any investment though, it is important to build a financial plan, assess your capability to tolerate, and appetite for, investment risk, build a suitable, diversified portfolio which aligns to your risk profile, and then implement this plan.  AAM will monitor your portfolio and recommend rebalances when required to ensure that the portfolio remains aligned, as well as provide clear and concise advice and reporting along the way.

A Call to Action

Whatever your thoughts on passive investing and ETFs, having a portfolio that is appropriate to your level of risk is even more important.  Advice from a licensed, regulated financial services company will help you to ensure that you have a robust and sensible plan in place to achieve your financial goals. Ongoing management, sensible diversification, low-fees and investments which are in the right currency for you may be more important than whether you invest using passive or active funds.  Overall, the approach to planning your financial future shouldn’t be passive even if the investment strategy is. So take the next step, and book a consultation with us.

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