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Family Office Investments - Using ETFs wisely

I have worked within capital markets and asset management for a large proportion of my career and the question of implementation of a family office investments is one that I lean on this experience a lot. If you don't know, Family Offices use ETFs ranging from portfolio completion and TAA bets. to long term holding

The challenge for some FO is that they are not often able/want to implement themselves and require counterparts that can take their ideas and execute.

Direct vs Intermediary - obviously you need a broker too execute, however there are different levels of agency here. Some are looking to use platforms such as Enfusion, which incorporates the trade blotter with the reporting structure and allows the internal investment team to act more like a classic asset management business with broker panels and portfolio management capabilities. Some are looking for execution only brokers and some are seeking full service. Often, the internal skill sets and needs dictate the different uses.

I think if I was in charge of dealing within a FO, I would prefer to have control of orders. Mainly as I like to know immediately if there are any issues and to confirm I have the exposure. Plus, I have had enough past experience with trading counterparties that struggle with the idea of available liquidity of ETFs vs single stocks.

That being said however, a lot of FO prefer to offload execution risk and have preferred brokers or banks to do the actual implementation. It's often a better outcome to allow those that specialize in the space to compete the trade, particular if there are some nuances to the investment.

ETFs are not Stock - ETFs have idiosyncrasies that need to be managed and you need to find someone that knows the structure. For example, liquidity of the fund is dictated by the underlying constituents, not the on market liquidity that you see on the screen. Knowing how to engage the market makers and other liquidity providers can be left to the market participant or adviser, not the FO. There is also the mechanics of the application and redemption process, the iNAV as well as the primary vs secondary market for larger orders.

Is an ETF the right choice - ETFs are a great tool for FO as they provide easy implementation (no need to open new accounts), anonymity and an ability to "go anywhere" in terms of geography, sectors, factors, assets classes without having multiple counterparties. They also sit on exchange and therefore the liquidity is T+2, regardless of the asset class. There is on-exchange liquidity, time series data and ease of reporting.

However, as we see more fund managers launch active ETFs alongside their unlisted funds, you need to keep an eye on costs. There is one big cost with ETFs that isn't there for the unlisted trust - brokerage.

If you can get exactly the same exposure via the unlisted trust and the position is expected to stay in the portfolio for longer than a tactical bet, there is a case for using the unlisted fund and making application and redemptions through their chosen platform. Spread costs should also be considered and compared - both on exchange and the application/redemption costs as noted in the PDS.

Get Advice - find a firm or individual that knows ETFs and can educated the family on the mechanics, risks, benefits and challenges. If you're paying fees for implementation, get the counterparty to do some heavy lifting on improving the knowledge of the family office, across generations and assets.

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