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May 3rd, 2012 by

What are ETF’s-Portfolio Building Blocks By Tom Lydon

April 9th  2012

The exchange traded fund industry has matured like a fine wine, getting better with age. However, the business has transformed in ways that were unseen back in 1993, when the first U.S. ETF launched.

“The uses of ETFs have changed. It started as a strong institutional product but we are now seeing them being used by wealth managers as building blocks in portfolios,” Jim Ross, managing director of State Street Global Advisors, said in a recent report.

Ross said that when the first ETF launched in 1993, SPDR S&P 500 ETF (NYSEArca: SPY), he had no idea that the funds would be used in the ways that they are today, reports Alex Plough for CityWire. Wealth managers have started to use the funds in active ways to manage beta exposure.

“They can use the beta qualities of ETFs to get that exposure and can switch in and out because of its liquidity. We are now seeing people manage their fixed income with ETFs and dividend strategies have got a real strong foothold in the US and over here,” Ross said.

According to a recent study by SPDR ETF, the ETF arm of State Street Global Advisors, around 50% of fund users questioned have used these tools to gain tactical exposure to particular markets.

Furthermore, contrary to popular belief, ETFs have not taken away the need for active managers and the need for this middle market are more valued. Managers are still able to find the right risk profile, asset allocation, know what to invest in and when to get out. ETFs can not do that.

The growth is going on beyond U.S. borders, as about 25.2% of UK wealth managers questioned used ETFs for strategies involving dividends and fixed income. [Special Report: Navigating Higher Rates with Bond ETFs]

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.

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