T here were few exchange-traded funds (ETFs) 10 years ago and the average Asian investor was unsure how they operated. Now, ETFs are poised to become increasingly mainstream as product suppliers expand their ETF portfolios and embark on investor education. 'During the course of the year we have been increasing our ETF offerings and focusing on investor education,' said Bruno Lee Kam-wing, HSBC head of wealth management, personal financial services (Asia-Pacific). Mr Lee said ETFs could provide an easy means of diversifying investments. HSBC is promoting the ETF investing concept through various incentives including discount offers. 'We are targeting those investors who already invest in stocks and individuals interested in gaining exposure to various investment markets,' Mr Lee said. HSBC offers 18 ETF options. Most ETFs are a fusion of an open-ended fund and a stock. However, unlike mutual funds, individual investors do not buy or redeem shares from the fund. Instead, investors buy and sell shares of the ETF on an exchange. The ETF concept first appeared in Hong Kong in 1999, when the Tracker Fund of Hong Kong (TraHK), managed by State Street Global Advisors, was one of the first ETFs in Asia. ETFs can be bought and sold throughout the trading day - like stocks. But unlike stocks that track the fortunes of just one company, ETFs track an entire stock index or sector. This gives them the same benefits of diversification as a mutual fund, but in an investment environment that behaves like a stock. Similar to index funds, all ETFs are passively managed or indexed, which means that each tracks a sector-specific, country-specific, or broad-market index. ETFs are often referred to as 'passive' investments, because there is no overall manager dictating which companies the ETF should buy or how much it should buy. Mr Lee said ETF transactions incurred brokerage commissions, but the savings from lower annual fees could help offset these costs for long-term holders. He said another thing to consider was that the cost of acquiring the underlying securities for the fund was included in the ETFs bid/ask spread, which could provide benefits to short-term and long-term investors. While the ETF market in Asia has been relatively slow to take off, elsewhere the ETF market has been expanding rapidly. ETF assets under management in the United States grew from US$83 billion in 2001 to more than US$400 billion by the end of last year, increasing four-fold in five years. Analysts expect the category to reach US$2trillion in assets under management worldwide by 2011. Globally, Barclays Global Investors (BGI) is the product leader in ETFs with more than 290 funds under the iShares brand for institutions and individuals trading in 19 markets. BGI offers three iShares ETFs in Hong Kong - iShares FTSE/Xinhua A50 China Tracker, iShares MSCI China Tracker and iShares BSE Sensex India Tracker. BGI chief executive for Asia excluding Japan Mark Talbot said: 'These iShares ETFs offer a simple and cost efficient way for investors in Hong Kong to own a diversified portfolio of leading Chinese and Indian companies.' He said ETFs provided exposure to an index at low cost. 'An investor who compiles a portfolio of stocks would potentially incur high transaction costs. The diversification is also an important element to any balanced portfolio.' Investors can also trade market exposure efficiently by buying ETFs on margin, or borrow them and use ETFs to take short positions. 'These characteristics and their availability for a wide variety of sectors and country stock indices have made ETFs popular among institutional investors such as hedge funds, which use them extensively to take levered positions and short positions,' Mr Talbot said. Joseph Ho, Societe Generale (SG) managing director and head of ETF sales and marketing based in Hong Kong, said the Asian ETF frontier was prime for expanding because new ETFs covering different asset classes were increasingly being offered to the market. He said a lack of investor education and a relatively small choice of ETF investment tools had been the primary cause for the lack of investor interest compared with the US. He said US investors often used ETFs to reduce capital gains tax exposure which was charged on gains from mutual fund investments. From its portfolio of 105 ETF products, SG offers seven ETFs in Hong Kong including Asian-themed funds focusing on South Korea, India and Asian emerging markets, MSCI world, Nasdaq100 an equity-based Russia fund and a commodities fund. 'We plan to expand the product offerings and widen the asset classes available to Hong Kong investors,' Mr Ho said.