Exchange Traded Funds (ETFs) do not have to be used in a portfolio exclusively at the expense of managed funds, according to a boutique planning practice adviser.
Neville Ward Advice certified financial strategist Andrew Reeve-Parker said the two investment vehicles can be used to complement one another within one portfolio to achieve stronger results.
"We use the core/satellite approach so we use the ETF to get access to low cost beta," he explained.
"So we're happy to use an ETF for the top 20 Australian equity stocks because an ETF is transparent and we know what's in there.
"And then we outsource to a [active] manager who can go and play in the small cap universe where there really is an information advantage to benefit from."
Information about the top 20 Australian Securities Exchange (ASX) listed stock was extensive and readily available whereas valuable information about smaller cap shares was gleaned only when specialist managers met with the relevant companies themselves, he said.
To illustrate how this well this strategy can work Reeve-Parker presented the cost of investment and return generated using this combined strategy compared to the use of an ETF alone.
His figures showed combining the iShares S&P/ASX 20 ETF and the Bennelong ex 20 Australian Equities Fund using a 60 per cent to 40 per cent split respectively between 31 October 2009 and 30 April 2012 generated a return of 6.22 per cent per year at a cost of 0.54 per cent.
In contrast the SPDR S&P/ASX 200 ETF produced a return of 1.52 per cent per year at a cost of 0.29 per cent.
"So it significantly outperformed by about 4.7 per cent per annum," Reeve-Parker said.
