European investors are well-served by the pantheon of exposures addressed by years of rapid ETF roll-out; however, issues of market fragmentation continue to add complexity when accessing the products, according to Keith Lowe, senior vice president for securities advisory and execution EMEA at Citi.
Lowe, whose team covers Citi’s most active clients – including family offices – with a direct line to an advisor, said ETFs play a variety of roles, from strategic asset allocations in broad markets and future themes, to vehicles for exploiting tactical opportunities within sectors and styles.
However, he argued the landscape for trading ETFs efficiently has evolved behind the now broad range of ETFs on offer.
“The focus should not necessarily be on product innovation, but on improving access to these solutions, for instance by reducing regional disparities.
“In eastern Europe, for example, with the registration of the ETFs, especially on the advisory front, we have to follow the rules and the guidelines are strict about what we can and cannot do.
“We would want to see more registrations in eastern Europe and the Middle East as those economies emerge.”
He added fragmentation adds friction when completing trades and greater education is needed, particularly for retail investors, by fund promoters.
“It is sometimes challenging because when a trade comes in, we need to be very specific on the details, such as the various listings and currencies a customer wants.
“This implies that more education by the industry is needed on the implications of trading on the various listings and venues and currently slows the process down because of its complexity.”
An ETF for every use case
Lowe said while most clients use ETFs within their core holdings, ETFs are a “great tool” for those looking to be opportunistic when trading volatile markets.
“ETFs are a way of gaining quick and efficient exposure as and when market dynamics change, enabling investors to access factors such as momentum or a thematic exposure without having to build a portfolio from the ground up,” he continued.
The wrapper plays a central role within Citi Wealth’s ‘unstoppable trends’, which cover themes and sectors ranging from G2 polarisation, defence, US infrastructure and onshoring, life science and biotech, digitalisation, cybersecurity, automation and robotics, electric vehicles and US energy producers.
“There is literally an ETF for every one of these themes and these are more long-term holdings with structural drivers, rather than short-term trades,” Lowe added.
Equity broadening opportunity
Zeroing in on where Citi currently sees bright spots in the short-to-medium term, Lowe noted the firm is overweight equities within its balanced asset allocation – at a 65.5% allocation.
“We expect the rally to broaden away from the ‘magnificent seven’ trade, so we are looking at areas such as US small and mid-caps, where we have a thematic overweight of 2.5%.
“We are also looking at S&P 500 equal weight trades, which our global investment committee has a 1.5% thematic position in, within our balanced asset allocation. We also look at US medical equipment and supply companies, which we have a 2% thematic weighting to.”
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.
