| Options With ETFs |
Asset allocation has always been vital for sustainable growth in a portfolio and one of the easiest ways to do it would be through Exchange Traded Funds or what is commonly referred to as ETFs.
ETFs are basically listed index funds that combine the diversification benefits of funds with the tradability of securities.
There are only few ETFs listed in Singapore but while they represent a range of asset classes from equities, commodities to fixed income, trading volume has so far been relatively weak.
In the first half of 2008, only $958 million worth of ETFs were traded here compared to the US$24.7 billion for ETFs listed in Hong Kong.
Market players feel that a combination of the lack of knowledge about the product plus the limited range available on the market here has limited its appeal to investors.
“I believe we have to give investors a supermarket of products to choose from, just like what we did with warrants here in Singapore. And of course, investors have to be educated about ETFs as well for the product to grow,” said Deutsche Bank managing director and head of ETF Thorsten Michalik on a recent visit to Singapore.
To that end, Deutsche Bank plans to launch a suite of ETFs in Singapore within the next six months and believes it can duplicate the success it has had with the product in Europe.
The bank is now Europe’s third largest ETF provider managing 13.9 per cent of ETF assets in the region. Having only started in January 2007, it now has 86 ETFs which range from equities, fixed income, currency and commodities.
According to Deutsche Research, asset under management for ETF’s rose by 39.6 per cent to US$812.2 billion in 2007. Notwithstanding the weakness of the capital markets at the start of the year, the first half of 2008 saw global ETF assets under management increase by another 0.9 per cent to US$820.4 billion. In comparison, the MSCI World Index declined by 11.9 per cent during the same period.
A large part of the growth has been attributed to pension funds moving to ETFs, which is seen as a price efficient tool to manage their investment. LEVERAGING ON ETFETFs offer investors flexibility and as part of active portfolio management, the product allows investors to lessen their stock holding but remain exposed to a particular sector or market.
“ETFs allow you to reduce the cost of your portfolio management by reducing the number of stocks in your portfolio but the returns stay the same,” says Deutsche Bank research analyst Raimar Dieckmann.
Investors with liquidity at hand may also choose to manage their cash by investing short-term in ETFs. This way, they do not miss out on price rises or forego income until a long-term investment decision is taken.
For example, if an investor intends to place his money on US equities but has yet to decide which stocks to buy into, purchasing an ETF with the S&P 500 as an underlying would allow him exposure to the index after which, he could sell it off and use the money once he has picked specific stocks to invest in.
The availability of short ETFs in the market would also allow investors to use them as a trading instrument to hedge their equity positions. The advantage of hedging with short ETFs is their cost-efficiency as there are no margins or security required for ETFs.
Obviously, ETFs have the flexibility that allow investors the opportunity to vary their investment strategies. With the Singapore ETF market expected to grow further within the next year with more players coming to list various ETFs, investors here would have exciting options to look forward to.
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