Investment Ideas

Asset Class Exposure

It isn’t a new story that in the current climate of low rates, investors are increasingly seeking yield and diversified returns for their portfolios.

From high yield and emerging market bonds, small capitalisation stocks and smart beta, to robotics, green energy and cryptocurrency, niche asset class segments offer investors the potential for attractive risk-adjusted returns. And with the global economy continuously developing, and new technologies and regulatory moves reshaping certain industries, the prospects of these niche asset classes can be transformed.

ETFs can offer investors exposure to these difficult-to-reach market segments, through an asset class exposure strategy.




Global ETF assets under management 1



Launched the first US-listed ETF



Global number of ETF offerings 2

Uses of ETFs: Asset Class Exposure

Many niche asset classes can be difficult to access via a mandate. This is where the breadth of exchange traded funds (ETFs) on offer can be advantageous, with thousands of indexes available globally -from UK equities to commodities. ETFs have therefore opened up niche asset classes that were previously difficult to reach and therefore uninvestable. Today, investors can simply buy an ETF providing exposure to the asset class in a transparent and easy to use way.

At the end of December 2018, there were 7,199 exchange traded products (ETPs -which include ETFs and exchange traded notes), available globally3, providing exposure to almost every asset class an institutional investor could want. Beyond the core exposures to major indices, investors can use ETFs to access sectors and sub-sectors, thematics, commodities and more.

The ability to quickly take a position in virtually any investable asset class or market segment has proved to be one of the most attractive features of ETFs.

Further, asset class segments such as emerging market bonds and smart beta are not widely available in pooled index funds and futures contracts are largely non-existent. For investors looking for the efficiency of a pooled fund, ETFs can be the best option available to them.

Removing the Complexities of a Direct Investment

Investing in a niche asset class can come with its own risks. A further advantage of investing in an ETF is that it mitigates the complexities of a direct investment, including researching and monitoring a less-known investment or significant administrative costs. For example:

  • A global equities manager seeks beta exposure to the small capitalisation sector but lacks the research depth to cover the exposure in-house. Instead, they invest in a global small capitalisation ETF.
  • A superannuation fund wants to diversify its default fund by investing in commodities, while avoiding the complexities of derivatives exposures and physical holdings. Instead, they gain exposure though US-listed commodity ETFs.
  • An industry fund manager with a small but fast-growing portfolio wants to make a 10% allocation to US listed convertible bonds to improve risk-adjusted returns across the portfolio. The ticket size is relatively small, but because the portfolio is experiencing strong growth, they want to ensure they could incrementally add to the exposure over time with minimal administrative effort. For these reasons, a mandate was ruled out. Instead, they made an initial investment in a convertible bond ETF listed on the New York Stock Exchange.

Asset Class Exposure with SPDR ETFs

We launched the industry’s first US-listed ETF in 1993 as a cash equitisation vehicle for institutional investors. Since then, institutions remain some of the largest investors in ETFs, with usage continuing to expand across a wider range of investors and investment strategies.

ETFs offer investors further benefits –they are low cost, simple, tax efficient and easy-to-access investments.


SPDR Bond Compass - Quarterly Report

ETFS vs Futures

The use of ETFs for cash equitisation is popular with overseas asset managers, but Australian investors generally prefer using futures as a cash equitisation tool. But using ETFs for all or part of a cash equitisation program is likely to enhance returns and provide better after-tax outcomes.

More information

1Source: Morningstar, as of March 31, 2019.

2Source: Morningstar, as of March 31, 2019.

3Source: Morningstar, as at 31 December 2018