The ‘Democracy’ Of The ETF Toolbox

By Robin Bowerman | More Articles by Robin Bowerman

Independent exchange-traded fund (ETF) researcher Deborah Fuhr describes ETFs as the most democratic investment product to her knowledge.

Fuhr, managing partner of London-based research group ETFGI, gives her description of ETFs in a recent issue of ETF Perspectives, published by Vanguard in the US.

As Fuhr says, institutional and retail investors in ETFs have "access to the same toolbox" at a generally low cost.

"I was recently asked to teach a seminar at Nairobi Securities Exchange," she recalls. "So, I went to Kenya. It demonstrated to me once again that ETFs have become a global phenomenon.

"They’ve created the opportunity to access different asset classes and markets in a cost-efficient fashion, and they’ve changed the way people invest."

In line with Fuhr’s comment about the democracy of ETFs, it’s worth emphasising that the products enable individual investors and their advisers to practice the techniques of heavyweight institutional investors.

This includes the use of ETFs in the creation of widely-diversified portfolios in accordance with their strategic or target asset allocations, to rebalance their portfolios and to make tactical adjustments to their portfolios.

While the vast majority of investments in Australian-listed ETFs are tracking broad market indices, more Australians are investing in the growing range of factor-based ETFs.

Factor-based investing adopts a systemic, rules-based process designed to capture a specific investment objective such as more dividend income, lower volatility or higher risk-adjusted returns.

These products focus on one or more of the underlying factors that help to explain an investment’s risk-and-return characteristics; the DNA of an investment.

You might have been considering, for example, investing in ETFs targeting higher dividends. (Factor-based investments would typically only make up a small proportion of an investor’s appropriately-diversified portfolio.)

It could be said that the increasing availability of factor-based ETFs to individual investors as well as institutional investors is a further illustration of the democratic character of ETFs.


Robin Bowerman

About Robin Bowerman

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

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