Forging new frontiers in ETFs

PUBLISHED : Monday, 15 April, 2013, 12:00am
UPDATED : Monday, 15 April, 2013, 3:11am

Deutsche Asset & Wealth Management last week launched five exchange-traded funds (ETFs) in Hong Kong, offering exposure to high-dividend stocks in Bangladesh, Pakistan, the Philippines and Singapore, and to Asia more broadly.

One's first response might be to sneer that high-dividend stocks are just so 2012. Investors are on a much more bullish footing these days. No need for modest, mid-risk assets such as dividend stocks. The bets these days are more on high-growth equities and high-yield bonds.

However, if you look at the state of the markets - the Hang Seng is down 2.5 per cent year to date, the MSCI Asia (ex-Japan) index is off 1.9 per cent, and so on - perhaps high-dividend stocks still make sense.

Of course, investors are taking on plenty of risk with these ETFs. Bets on "frontier" markets such as Bangladesh and Pakistan are not to be taken lightly. A focus on dividend stocks allows investors to hedge their risk slightly, by opting for more conservative, income-oriented investments.

Marco Montanari, Deutsche Asset & Wealth Management's head of passive asset management, says the ETFs were basically a result of looking at the Asian market and seeing what was popular. Investors like ETFs that give them access to exotic markets. Deutsche already offers a Vietnam equities ETF, which investors like. So it made a decision to target Bangladesh, Pakistan and the Philippines.

And Hongkongers have put a lot of money into income funds in recent years, in particular high-dividend equity funds. So Deutsche put the two together, launching dividend-focused ETFs that access exotic markets.

"We have seen two things. The first is that the Vietnam ETF has been very successful. People use this fund as an access product. And second, that people like high-dividend, high-yield funds," says Montanari.

Deutsche included a Singapore ETF in the mix because that market has a lot of high-dividend stocks.

The Asia fund is more generic, but in fact it is Hong Kong's first Singapore-focused ETF, and it's another option for people who like high-dividend equities.

But surely the products that will attract most investor interest are the Bangladesh and Pakistan funds - also the first such ETFs available in Hong Kong. These do what ETFs do best, giving individual investors access to remote markets that would otherwise require expensive mutual funds with annual management charges in the realm of 2 per cent, and up-front selling commissions of typically 5 per cent.

ETFs are sold like stocks, so their selling commission is equal to that of stocks, usually just 0.25 per cent. The low commission means that banks and financial advisers generally won't recommend ETFs - they don't many make any money from them - so you have to ask for them.

The Pakistan and Bangladesh ETFs' yearly total costs are 1.25 per cent, including all expenses.

For those with a taste for risk and a stomach for frontier-market volatility, they're a bargain.