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Your ETF selection, updated

October 13th 2017

New changes will not only lower the costs for our clients but diversify our models further. This constant monitoring of your portfolio, the focus to diversify risk, reduce costs and increase geographic exposure are just of the ways we're looking after you.

We often field questions of why anyone would not just select their own asset allocation, buy their own ETFs and manage the portfolio themselves through a broker. We welcome these questions and have not only written a riposte about these topics but also have a savings tab in our app to help you identify just how much money you save with ETFmatic.

One point that we make in our argument is that as your investment manager, it is our responsibility to constantly monitor all the ETFs in your portfolio. Ensuring that we are implementing your chosen asset allocation with ETFs that have the lowest possible total expense ratios (TERs) with the lowest tracking errors and highest liquidity possible. In fact, as our whitepaper indicates, we have an entire framework to ensure we only select the best ETFs from the best providers. We review our model portfolios on a periodic basis in order to adhere to the standards we set ourselves.

Updating our model portfolio ETFs

Having just completed this review we are therefore updating our asset allocations and model portfolios with new ETFs. Our aim has been to standardise our investment offering across the three currencies (GBP, USD and EUR). We want our clients to have the same asset class exposures and same investment philosophy regardless of which currency they invest in. With this in mind, we have changed the international bond allocations in our EUR and GBP starter and custom models. We now have index-linked/inflation-linked government bonds in all three currencies. The reason for this is that we want exposure to asset classes that can protect and thrive in various market cycles. Although equities provide some protection against moderate inflation, they tend not to offer the same hedge when inflation is high. We believe that diversifying our portfolios and protecting for inflation is a prudent decision.

In our ETF review we looked at all our current holding and the 11 filter criteria we use. This resulted in several switches from our current ETFs to our newly selected ETFs. As we use the MSCI All Countries World Index as a broad steer of the regions we want to diversify portfolios across, we have allocated to ETFs that lower the cost of the portfolios, yet still adhere to this international geographic exposure as much as possible. These switches will result in lower TERs (the fees of the underlying ETFs) for our clients. A balanced (50% Equities/50% Bonds) GBP portfolio now has a TER of 0.13% versus its previous 0.22%. With our USD model, our balanced model TERs have reduced from 0.15% to 0.12%. Lastly in our EUR models, our TERs have stayed constant, however, we have greatly diversified the asset allocation for our clients and have a geographic breakdown that replicates the MSCI AC World index better while providing uniformity when compared to our USD and GBP portfolios.

Implementing these changes

We recently implemented the ability to hold multiple ETFs per index. The aim was to ensure that when we implemented any product switches, we could do it in an efficient manner. Rather than selling one ETF completely and buying another, which could result in negative tax consequences, our portfolios will naturally allocate out of our older ETFs (whenever selling is required) and into our newly selected ETFs (whenever buying is required) over time. This should ensure a natural transition and potentially mitigate negative tax consequences.

These changes will be reflected in our starter and custom portfolios. As our investment plan portfolios work on modern portfolio theory that use very specific algorithms around asset class correlations, returns and volatility, we have kept the bond asset classes and ETFs the same.The equity section of our investment plans will be updated with our new ETFs.

We believe these new changes will improve our offering by not only lowering the costs for our clients but diversifying our models further. This constant monitoring of your portfolio, the focus to diversify risk, reduce costs and increase geographic exposure are just some of the ways we're looking after you.

With all investments your capital is at risk and the value of your investments and the income deriving from it can rise as well as fall. Past performance is not a guide to future performance.