Investors less than impressed with returns elsewhere have been taking a fresh look at the merits of ETFs (exchange-traded funds). Such interest is not a spontaneous reaction to market conditions and unwelcome bulletins about underperforming instruments. Providers and financial advisers are also playing their part, offering new choices on the one hand and refreshing candour on the other about overall prospects and relative fee structures.
'The number of ETFs listed in Hong Kong has increased significantly in 2012,' says Marco Montanari, head of Deutsche Bank ETFs and db-X funds in Asia. 'Among them, we have seen the first linked to Indonesia, Malaysia, Thailand, and the Australian dollar overnight rate. They are interesting because they give access to markets that are more difficult to invest in and give people in Hong Kong the possibility to diversify beyond their local market.'
But with so much to choose from already, Hong Kong investors - retail and institutional - are not simply looking for something new. Scarred by the volatility and losses of recent years, they want better assurance of steady, if unspectacular, returns and to shake off the feeling that results achieved by 'active' management of comparable mutual funds don't justify the level of fees imposed.
With 'passive' management that tracks designated benchmarks and pre-defined indices, ETFs are built to offer transparency and liquidity. With no upfront loading and a lower scale of fees, they offer an obvious attraction for anyone wary of products that seem to do more for the provider than the investor.
'The key advantages of ETFs are in terms of cost and the flexibility of trading intra-day during market hours,' Montanari says. 'They are priced very aggressively with a total expense ratio often lower than 0.7 per cent per annum. However, ETFs are funds and [must] compensate several service providers, such as the custodian, administrator and transfer agent. They ensure the robustness of the structure which is one of the keys to the success of the ETF market.'
Montanari cautions investors to know what they are getting into. This means reading the prospectus, understanding the ETF's correlation to its pre-defined index, and studying the legal documentation before committing.