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BLOGS. May 2, 2024

Funds of ETFs – A New Risk Management Conundrum?

The steady rise of passive investment strategies, through allocation to exchange-traded funds (ETFs) in particular, has long been documented in financial literature. It does not simply represent an economic challenge to traditional active investment fund providers. For many asset management firms, the popularity of passive indexing among end investors is a double disruption factor. Beyond sustained fee pressure, it moves these firms’ value added from a balanced combination of “asset selection” and “asset allocation” processes into pure “asset allocation” territories. While bottom-up investment specialists redirect their asset selection skills towards more “alternative” strategies and Alpha products, the world of pure Beta offerings keeps expanding. Passive ETFs (a.k.a. index trackers) are now available across a wide range of markets and asset classes. They cover developed and emerging economies, bonds and equities, commodities and more. For asset allocators, this ETF universe expansion might be a blessing in disguise, provided they can overcome selected operational and risk management burdens.

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