The Most Underserved Market is Looking for Some Pop
June 24th, 2021
Global wealth has skyrocketed since the onset of the pandemic; it rose by 8.3% in 2020. North America, Asia (ex-Japan), and Western Europe are the primary holders of this wealth and the most underserved communities in these regions are those with between $100,000 and $3 million in wealth. This group holds 331 million people globally and has $59 trillion of investable wealth. Financial and Wealth managers don’t properly care for this market segment, which has relatively simple needs. They get standardized products with poor client experience. Anna Zawarsky, global leader of BCG wealth management said “wealth managers must embrace a new approach that lets them reach a larger audience in a cost-effective and scalable way, but with a highly personalized offering.”
Magnifi can help advisors solve this issue through its clear and simple engagement tools which bring clients closer to their investments, even for those advisors who specialize in mass affluent clientele. For example, Magnifi allows advisors to demonstrate and activate portfolio enhancements (e.g. finding comparable funds with lower fees and better performance), showing clients the value they bring to the table as well as personalizing the experience.
The Right Balance of Technology is Key to Client Attraction and Success
June 24th, 2021
Technology has augmented investing in a variety of ways in the last decade, but its presence is still growing. One of the most transformative aspects is how technology has ushered in new investors who can select products that align with their interests. However, leaderboards and rewards can have harmful impacts on clients by putting on social pressure. This can alter judgments and lead to bad investments. ‘Gamification’ can go too far and push clients to harm their portfolio, but the right amount of technology still allows clients access to information related to different assets and how they align with their portfolio. Investment technology can nudge clients in the right direction for their portfolios without having perverse incentives. For example, clients might want to better understand what is driving investment selection in their portfolios but maybe should not take over that function.
As a specific example, Magnifi allows advisors to introduce specialized firm model portfolios to clients, allowing the client to better understand the rules governing the investment selection of their portfolios without having to get deep in the weeds.
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Active ETFs
An Exchange Traded Fund (ETF) is an investment vehicle that bundles a diversified portfolio of stocks and bonds, with shares sold on the stock exchange.
While ETFs started as passive investment vehicles, there are many that are now actively managed — overseen by fund managers who choose stocks and/or bonds in an effort to achieve above-market returns. These managed funds are called actively managed ETFs or active ETFs.
How Do ETFs Work?
An ETF functions like a cross between a stock and a mutual fund. ETFs are traded on an exchange like a stock. Yet these funds are comprised of shares of many stocks and bonds, like a mutual fund. As such, an ETF is a low-cost and tax-efficient option to invest in a variety of asset classes and investment strategies.
ETFs tend to have lower annual expenses than mutual funds, but due to the fact that they are traded like stocks, they come with higher transaction costs such as commissions, bid-ask spreads, and other fees.
What Is an Active ETF?
Most ETFs are passively managed — they track an index such as the S&P 500 or the Nasdaq. But as ETFs have grown in popularity, more and more of them have become actively traded, meaning that the fund’s manager actively buys or sells stocks and/or bonds to try to beat the market and generate higher returns.
Despite the growth of active ETFs, they are still quite a small part of the overall ETF market. There were more than 500 actively managed ETFs in the U.S. in 2021, which accounted for about $193 billion in assets under management. That may seem like a lot, but these comprise less than one-fifth of all U.S. ETFs and make up about 3.5% of the total dollar amount invested in ETFs.
Why Are Active ETFs Surging?
The market for ETFs has more than quadrupled in less than a decade, leaping from $1 trillion in 2010 to more than $4 trillion in 2019. In 2018 alone, institutions currently investing in ETFs bumped average allocations in these funds to 24.8% of total assets, a significant increase from 18.5% in 2017. This phenomenal growth is driven by enthusiasm among institutional investors: 78% of institutional investors prefer ETFs to other index vehicles, according to a 2019 study of ETFs by Greenwich Associates.
There are several catalysts behind this surge in active ETFs, including the following.
No Minimum Costs
Active ETFs have a far lower barrier to entry than mutual funds, which is the other actively managed product people invest in. Actively managed ETFs do not require a minimum investment, unlike mutual funds, which typically demand an initial outlay that can run into the thousands of dollars. An investor can buy a single share or fraction of a share of an ETF, allowing them to add an actively managed investment to their portfolio for as little as $1. While it’s important to be alert to fees and commissions associated with ETFs, many brokerages now offer commission-free trading, which makes ETFs even more affordable and accessible.
Tax Advantages
ETFs are known for tax efficiency in contrast to traditional mutual funds. ETFs are often more tax-efficient because they are index funds, which have fairly low turnover and thus provide less chance to realize gains when stocks or bonds are sold. More importantly, ETFs have a particular structure that is even more central to their tax efficiency. Shares of ETFs are created and destroyed through in-kind transactions that take place between the fund’s sponsors and an organization called an authorized participant. Due to this set-up, ETFs don’t usually have to directly sell positions from their portfolios to meet redemptions and can in this way avoid taxable capital gains distributions.
Rapid Risk Management
Volatility in world events and economic circumstances in the last few years has left traders with a taste for being able to easily and rapidly manage risk as things change. As investors seek to reposition their portfolios to address a variety of risks, ETFs are a good tool to actualize specific changes without undue hassle. Other characteristics of ETFs, such as execution speed, single-trade diversification, and liquidity, are also helpful in mitigating risk.
Versatility
Institutional investors continue applying ETFs to more and more portfolio functions. This is possible because these funds have phenomenal versatility and can be applied to a wide range of strategic and tactical goals. It helps their popularity that institutional investors tend to prefer ETFs for factor-based and other specialized exposures.
Downside Protection
Early in 2021, actively managed ETFs clocked in at $200 billion in combined assets under management. Investors continue to seek out high returns with robust downside protection in an economic environment that remains in turmoil. Active management can be a key to that downside protection, and active ETFs are an affordable and accessible option for investors.
What Are Common Active ETF Applications?
- Tactical adjustments: Strategically tweak a portfolio to increase or reduce exposure to certain styles, regions, or countries.
- Strategic allocation: Bolster a portfolio with a long-term strategic holding.
- Rebalancing: Reduce risk between rebalancing cycles.
- Portfolio management: Round out and balance strategic asset allocation.
- Global diversification: Get access to foreign markets.
- Cash flow management: Help maintain liquidity.
- Transition enablement: Enable smooth management transitions.
- Risk reduction: Mitigate risk and hedge changes in allocation.
Pros and Cons of Active ETFs
Pros
- Active ETFs do not have investment minimums, and thus have a low barrier to entry.
- Many brokerages offer commission-free trading, making ETFs affordable and accessible.
Cons
- Active management does not necessarily translate to higher returns.
- Active ETFs charge higher fees than passive ETFs regardless of performance.
Unlock a World of Investing with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the June 21, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Global Investing
Global Investing
U.S. investors tend to stay close to home, prioritizing domestic stocks and funds. But non-U.S. markets comprise 57% of global investment opportunities, which means that close to half of those opportunities exist beyond U.S. borders. Some of the world’s largest technology, energy, and financial companies are international, such as Samsung in South Korea, Mitsubishi in Japan, ING in the Netherlands, and Allianz in Germany.
What Is Global Investing?
For many investors in the U.S., going “global” means investing in European companies. But this is a limited — and limiting — view of global investing. There is plenty of energy in non-U.S. and non-European markets around the world, from Southeast Asia to South America to Africa and beyond.
Global investing means taking all of the markets around the world into consideration and putting some of your investment dollars in stocks and funds outside of the U.S. and Europe.
Global Fund vs. International Funds
In the world of investing, “global” and “international” are not interchangeable terms the way they are in other contexts. Global funds and international funds are distinct, with different rules, goals, and opportunities.
Global funds are comprised of securities from around the world, including the investor’s home country. Global funds give investors the chance to diversify and reduce country-specific risk while still including their own country in their investment portfolio.
International funds, on the other hand, contain securities from around the world with the exception of the investor’s home country. These funds are a way for investors who already have a robust domestic portfolio to diversify outside that sphere.
Why Invest Globally?
Investing globally — and for U.S. investors, specifically beyond the U.S. and Europe — is an effective way to reduce risk in a portfolio and also opens up the door to investing in all sorts of opportunities that don’t exist in one’s home country.
As we pull out of the acute phase of the coronavirus pandemic, the economies of emerging-market and developing economies are projected to grow faster than the United States. These countries are on track to be the largest contributors to global GDP by 2042, and by 2050 will account for almost 60% of the world economy.
Accordingly, developed and emerging markets are beating the S&P 500 so far this year, with China, South Korea, and Japan showing strongest growth. In fact, some analysts are predicting that foreign equities might outperform U.S. stocks as a whole in 2021.
The growth of global funds in particular is a huge opportunity for investors. PwC predicts that global assets under management will reach $145.4 trillion by 2025, almost double the $84.9 trillion that was under management in 2016.
Investors who overlook these opportunities are limiting their ability to diversify, which increases risk in their portfolios. Owning a globally diversified portfolio protects investors against seeing serious losses when stocks in one country suffer setbacks that aren’t felt elsewhere.
Overlooking global investments also causes investors to miss out on some phenomenal investment options. There are exciting things unfolding in business around the world — in Brazil and China and Eastern Europe, for example — and U.S. investors who aren’t tapped into global options will lose a chance to capitalize on that energy.
How to Invest Globally
While global investments are unlikely to make up a majority of a U.S. investor’s portfolio, it’s a good idea to target a sizable chunk of assets to invest overseas. According to Christine Benz, Morningstar’s director of personal finance, professionally managed asset allocations typically target 25-33% of the portfolio in overseas investments. This can be a good benchmark for individual investors to look to.
Investors can add global investments to their portfolios by buying stocks or exchange-traded funds (ETFs).
Stocks
There are a number of ways to invest in foreign stocks. U.S. depositary banks issue American Depository Receipts (ADRs) that attest to a right to ownership of a share or fraction of stock of a foreign company that trades in U.S. markets. U.S. Investors usually find it more convenient to own the ADR instead of the share of foreign stock itself. Alternately, depositary banks in an international market, usually in Europe, issue Global Depository Receipts (GDRs) that attest to ownership of shares in a non-U.S. company. GDRs are available to institutional investors in and outside the U.S.
Some investors may find it advantageous to invest directly in the stocks or bonds of foreign entities, perhaps with an eye toward acquiring a decisive stake in a company. This is not a good strategy for the casual investor, as there are many complex factors involved in these transactions, such as tariffs and trade barriers.
Exchange-traded funds (ETFs)
ETFs group many different stocks or bonds — sometimes thousands — into a single fund that is traded on the stock exchange like an individual stock. These funds can focus on global stocks and sometimes have a regional focus. Individual investors are not allowed to buy mutual funds that are based outside their home country, so investors should buy a fund based in their own country that includes global investments.
4 Ideas to Remember About Global Investing
Global investing is a good strategy for those who want to reduce their risk, open themselves up to exciting new opportunities, and become more sophisticated in their investing approach. Here are four important ideas to remember when considering global investing:
- U.S. investors should look beyond Europe to truly diversify their investing globally. Great opportunities exist in regions all over the world.
- Global investing allows you to diversify your money and mitigate your risk so that when stocks in a given country take a hit, your portfolio stays strong.
- Being open to investing beyond the U.S. and Europe opens up many phenomenal investment opportunities that you may have not known existed.
- Global funds are a fast-growing and potentially lucrative investment opportunity.
Unlock a World of Investing with a Free Investment Trading Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the June 17, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.