“ETFs are doing the same thing as an index fund is. You are buying the largest 500 companies in the ETFs and you are buying the largest 500 companies in the funds. The risk here is how well they are buying and selling those stocks.”
Mr Li continues: “What I would ask in terms of risk is: are we buying all 500 of the stocks in a fund or ETF, or are we buying some of it?
“Are we buying it and then lending it out to generate some additional return? If so, you have then got counterparty market risk there.”
James Burns, head of the Smith & Williamson managed portfolio service, says that in a multi-asset portfolio there should be a mix of passive and active funds.
“I do not believe that investing in the cheapest base makes sense in the longer term,” he says.
“There have been enough years for journalists to extol the virtues of passive investing and the markets going up, but at some point that will change and that is where active management will have to come to the fore and prove its worth again.”
Ima Jackson-Obot is deputy features editor of Financial Adviser and FTAdviser.com
