Funds investing in ETF to gain quick access to markets

Written by Norzuhaira Ruhanie
Friday, 28 August 2009 17:28

KUALA LUMPUR: The popularity of exchange-traded funds (ETFs) is expected to continue as more market players — both institutional and retail — realise the appeal of the instrument. ETF assets have grown by 11% year-to-date, according to Barclays Global Investors’ latest ETF Landscape Industry Review.

Teoh Kok Lin of Singular Asset Management said that ETFs provide investors with an entry point to not just one market but also to shares previously inaccessible. He gave the example of China’s A-shares, which are only available for trade by mainlanders and selected foreign institutional investors. However, investors worldwide are now able to buy into the stocks via two ETFs listed in the US and Hong Kong respectively.
“ETFs are also popular with investors who do not want to buy into specific stocks but instead prefer to have exposure to certain markets or sectors,” Teoh said.

More fund managers are making ETFs a part of their portfolio. CIMB-Principal Asset Management Bhd chief investment officer Raymond Tang said at a briefing last week that ETFs gave fund managers quick access to a market that they were positive in, whilst they looked for suitable stocks to invest in.
Examples of local fund managers holding ETFs include Pacific Mutual Bhd and CIMB-Principal. The former’s Pacific Asiapac Income Fund, as at July 31 2009, held 2.57% of Lyxor ETF MSCI Taiwan listed on the Singapore Stock Exchange. CIMB Principal Asean Equity Fund meanwhile has bought into CIMB FTSE Asean40. Both funds are investing in key Asian economies namely China, Singapore, Taiwan and Hong Kong.

Eric Wong, Lipper’s head of research based in Hong Kong, said that besides being able to penetrate into specific regions, ETFs allow investors and fund managers to easily diversify their fund portfolios and gain exposure to investment styles or themes because ETFs are mainly either index funds or track market benchmark indices. Given that ETFs are traded on the stock exchanges, the funds are thus regulated by the market regulators such as the Securities and Exchange Commission in US, and the Securities and Futures Commission in Hong Kong, he added.

“As such they provide investors (and fund managers investing in ETFs) with more protection than investing in other types of investment products such as private equity funds and hedge funds,” Wong explained.
In addition to the trend of funds including ETFs as part of their investment portfolio, there are also funds that have ETFs as the bulk of their investment. For instance, Prudential Fund Management Bhd’s Prudential Country Selection Fund invests at least 95% of its net asset value in ETFs. The Wall Street Journal reported in July that the next few years promise to bring tremendous innovation to the marketplace as some of the biggest names in the mutual-fund world seek permission to offer actively managed ETFs.
Wong offered another reason for ETF’s appeal: lower costs.

“ETFs generally have lower costs than other types of investment products such as mutual funds or absolute return funds because most ETFs do not require active investment management because they are index funds or track market benchmark indices. In unit trusts/mutual funds, extensive infrastructure is required to handle record keeping and customer support. These functions incur extra costs.”
He said that ETFs are bought and sold through brokers and the fees for buying and selling ETFs are usually smaller than the fees incurred from buying and selling mutual funds.

He added that in many countries, ETFs can be purchased on margin and sold short, which allow fund managers to use ETFs to hedge their fund portfolios. Also, ETFs are allowed to be traded using stop orders and limit orders, which allow fund managers to specify the price levels at which they want to trade the ETFs. “These convenient features of ETFs lift the investment appeal of ETFs to the investment community.”