From Todd Rosenbluth: While the active mutual fund versus passive ETF debate continues to play out, it is easy to miss that not only are investors combining the products in their portfolios, but some mutual fund managers are also owners of ETFs.
Marketfield Fund (MFADX), an alternative global macro fund with approximately $1 billion in assets spread across share classes, held 19% of its assets in ETFs at end of June 2016. The majority of the assets were in single country ETFs. iShares MSCI South Korea (EWY) and iShares MSCI Mexico (EWW) were the two largest, but iShares products were also joined by Deutsche X-Trackers Harvest CSI 300 China A-Shares (ASHR) in the portfolio.
Meanwhile, BlackRock Strategic Income Opportunities Portfolio (BASIX) a $28 billion alternative credit focus fund holds 3% of assets in ETFs. iShares JP Morgan USD Emerging Markets (EMB) and SPDR Gold (GLD) are among such holdings.
However, alternative funds are not alone in using emerging market ETFs, as such products are inside more traditional mutual funds. One example is Fidelity New Markets Income Fund (FNMIX), a $5 billion emerging markets hard currency debt fund. Though the offering primarily focuses on sovereign bonds, including those issued by Russia and South Africa, as well as corporate bonds from companies based in Mexico and Venezuela, FNMIX had a 6% stake in ETFs at the end of June.
Single country iShares MSCI Brazil (EWZ) and iShares China Large-Cap (FXI) help the fund augment its stake in the more diversified iShares MSCI Emerging Markets (EEM). FNMIX, which has a below average expense ratio, is in the top quartile of its emerging market debt peer group on a one-, three- five- and ten-year basis.
ETFs provide all investors with low-cost exposure to an investment style. The liquidity most of them provide relative to futures or swaps enable asset managers to achieve what Martin Small, BlackRock Head of US iShares referred to last week at an event as operational alpha, by more efficiently making asset allocation decisions.
The benefit for advisors and individual investors is that greater usage of single country emerging market ETFs enables the products to trade with tight bid/ask spreads. For example, ASHR, EWW, EWZ and RSX trade with a penny spread.
This article is brought to you courtesy of CFRA.