Why some investors are opting for ETFs

The growing number and variety of exchange traded funds (ETFs) listed in Hong Kong means you may soon be able to dump your heavy-fee-charging mutual funds for a cheaper, more nimble alternative.

ETFs are rapidly growing in number and variety, offering investors similar choices and performance compared with many plain-vanilla mutual funds, but at a fraction of the cost. ETFs are funds that are listed like a normal stock on an exchange and they allow investors to buy and sell shares in the fund as they please. They are always based on an index of some sort, be it a country's main blue-chip index or an obscure sector index created by a bank.

Although only recently gaining popularity in Hong Kong after longer-running success in Europe and the United States, ETFs make index funds look like a costly, cumbersome option of yesteryear.

'I invest everything through ETFs. Why would I pay those extra fees?' Isabelle Bourcier, global head of ETFs at Lyxor Investment, said when asked about her personal investment preferences.

Annual fees for ETFs are generally well below 1 per cent, and may be as low as 0.1 per cent. Index mutual funds, on the other hand, may charge as much as 3 per cent. However, brokerage fees apply every time you buy and sell an ETF.

'Unless you have the time and knowledge to really select your manager to make sure you're getting your money's worth with the manager, an ETF can be a better choice,' Joseph Ho, head of ETF sales and marketing in Asia at Lyxor, said.

ETFs' core clientele has historically been institutional investors, but retail investors are quickly catching on. The downside of ETFs for retail investors is that there is no fund manager or fund house to provide you with information and answers to your questions. Instead, you are buying the investment tool directly on the exchange.