All the world's a trade with ETF's mixed bag of tricks

PUBLISHED : Monday, 19 March, 2012, 12:00am
UPDATED : Monday, 19 March, 2012, 12:00am


Exchange traded funds have their pros and cons. But one of the undisputed strong points of the instruments is their ability to open diverse, global assets to individual investors that would otherwise be off limits.

Indeed, ETFs cover much of the known investing universe. The instruments track equities, bonds, real estate trusts, commodities, and so on, across the world.

ETFs can track a basket of stocks in countries or areas that individual investors would find hard to access on their own.

Disappointed that you can't buy tech stocks like Apple or Google at today's prices? The Technology Select Sector SPDR efficiently gives exposure to these stocks at a much lower entry price.

In another example of the kind of diversification that ETFs offer, BlackRock's iShares CSI A-Share Consumer Discretionary Index ETF emulates the performance of the CSI 300 Consumer Discretionary Index, which tracks mainland consumer shares, a sector that is getting a lot of attention from policymakers in the mainland. (See Cover Story.)

This ETF could be paired with the China Construction Bank's China Policy Driven Fund, an ETF launched in January 2009 and carrying assets of HK$315 million.

This ETF's investment objective is to invest in a diversified group of equities that can directly benefit from the changing policies of the Chinese government.

Without a reference benchmark, this fund executes a total return strategy based on political, economic and sectoral analysis.

Timing, sector concentration, switching and tactical reallocation between mutual funds and ETFs are also adding more choices to the diversity and conflict of investment viewpoints.

Emerging market, dividend ETFs are an option for the rare Hongkonger seeking yield-oriented investments.

For example, DEM Emerging Markets Equity Income ETF, which is managed by WisdomTree, is the first emerging-market, dividend-focused ETF. Launched in 2007, it has attracted investment of US$820 million so far in 2012, making it the ninth fastest growing US ETF this year.

At the end of 2011, this ETF was offering a dividend yield of 6.4 per cent, which is substantially better than the 3 per cent yield on the MSCI Emerging Markets Index and 2.2 per cent on the S&P 500.

'Low interest rates and the ability to design an ETF that is based on corporate fundamentals rather than market capitalisation allow originators to track innovative indices,' says Keith Chan, head of listed product sales for HSBC.

Active ETFs - which allow managers to pick and chose strategies to (hopefully) outperform the general market - were given a boost when Pimco launched the ETF version of its huge Total Return Fund earlier this month. This ETF will reflect the performance of Pimco's Total Return Fund, which is the world's largest bond mutual fund with nearly US$245 billion in assets.

It allows investors to match the performance of a well-known fund run by a famous manager, Bill Gross, and trade shares on a real-time basis.

In February, Ping An of China Asset Management (Hong Kong) launched three new ETFs. One of them, Ping An of China CSI HK Dividend ETF, tracks 30 dividend-paying stocks focused on China. It was the first dividend-focused ETF to list in Hong Kong.

In another new category, Asian fixed-income ETFs offer investors a chance to access returns from a diversified portfolio of Asian bonds. Traditionally, Asian bonds have been difficult for the average local investor to find and manage at a reasonable cost.

These instruments trade like listed securities, but provide an investor with exposure to the bond market, tracking the performance of fixed-income indices and investing in a basket of bonds without requiring the investor to actually buy bonds.

In December 2011 BlackRock (Singapore) added two more Asian fixed-income exchange traded funds to its Singapore-listed fixed-income ETF stable.

The iShares Barclays Capital USD Asia High Yield Bond Index ETF is the world's first ETF to provide access to the Asian high-yield credit market.

The iShares Barclays Capital Asia Local Currency 1-3 Year Bond Index ETF provides access to Asia's local currency bond markets.

'The range of ETFs tracking fixed income indices means investors can pursue particular fixed-income exposures and tactically adjust their portfolio in line with their investment view,' says Sandra Lee, head of iShares Asia ex-Japan at BlackRock.

So investors are beginning to see more ways to invest in Asian bond markets, at varying levels of risk-adjusted return that suit their investment requirements.