| Exchange Traded Funds: no frills exposure |
|
|
| 06/03/2005 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
They are so liquid that they can turn cash into something close to equities in a split second and be reverted into cash the same day. The launch of exchange traded funds (ETFs) in Europe in 2000, more than 7 years after the creation of the American ETFs, was an instant success followed by months of exponential growth. In the 20 months that followed their beginning, more than 70 European ETFs appeared, and they soon had €4bn in assets under management. By year-end 2004, there were 114 ETFs worth over €30bn in Europe after a 66.5% growth in 2004, according to Morgan Stanley's 2004 ETF year-end report This is still far from the $228bn assets invested in the 152 American ETFs, that have undergone a 50% growth in 2004, largely fuelled by retail investments as institutional investors now seek more active management. All in all, according to Morgan Stanley, there were 336 ETFs with assets of US$310 billion, managed by 40 managers on 29 exchanges around the world at the end of the fourth quarter of 2004. Diversification The shares of an ETF, which perfectly replicates an index or a sector are freely traded on the stock markets, are both transparent and liquid, two characteristics sought after by investors. In order to ensure the liquidity of an ETF and to secure a price that tracks the index, an ETF manager usually creates more shares in the fund so that the prices of the stock represents the value of the underlying and not the demand for the ETF itself. And ETFs providers are developing an increasingly diversified array of products going further than the traditional large American and European indices to attract even more investors. In 2004, State Street launched its StreetTracks Gold Shares, which lets U.S. investors own gold bullion. The results were encouraging with inflows totalling $1.3bn in assets into the ETF by the end of the year. Barclays Global Investors -- the world's largest provider of exchange traded funds -- launched the first ETFs tracking the Chinese market with its iShare FTSE / Winhua China 25. ETFs Vs. other investment vehicles
The array of new ETFs is likely to continue appealing to investors seeking to diversify their exposure. Here, ETFs come as a handy solution for investors willing to become exposed to a sector or index but that lack the resources to do so. This is often the case for areas such as small and mid caps for which the trade costs can be substantial when dealt directly. Management tool Thanks to its high level of liquidity, ETFs can be used for the implementation of various strategies, among which the "equitisation" or "bondisation", which allow investors to optimise the returns of their cash, before allocating it in the long-term. This is the strategy used by the €124 Norwegian Government Petroleum Fund (NGPF), whose assets increased suddenly following the radical increase in oil prices. From Q3 2003 to Q4 2004, NGPF's assets increased by about €22bn, part of which was first directed into ETFs for equitisation purposes. ETFs can also be used for tactical purposes as a convenient way to quickly over-weight or under-weight positions, or as a hedging tool or as a substitute to future where no future contracts are in place. All this at a low cost. According to Fitzrovia, the Total Expense Ratio (TER) of Luxembourg and Dublin-domiciled ETFs average 0.4%, while the TER for actively managed funds, that are not as liquid, average 1.75% and other non-ETF index tracking products charges on average 0.96%. But the cost of some bond ETFs can even go below 10 basis points. Morgan Stanley say that these lower costs are in part due to the lower portfolio and investor turnover, which allow for lower transaction and processing costs. And good news for ETF investors, Morgan Stanley banks on even lower costs in 2005. Contributing to this general decrease is the launch of low-cost product such as Indexchange's Jumbo Pandbriefe ETF. But albeit fraught with attractive characteristics, one of the downsides of ETFs is that the managers generally charge investors a commission upon buying or selling operations. J.L. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Articles of the same Topic : Portfolio management |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it