ETFs 'can help cut risks amid market volatility'

Share prices of FTSE 100 companies displayed on a screen in the atrium of the London Stock Exchange. While the FTSE 100 has gained around 12 per cent since the two-day sell-off following the UK's Brexit decision, possible market disruptions loom.
Share prices of FTSE 100 companies displayed on a screen in the atrium of the London Stock Exchange. While the FTSE 100 has gained around 12 per cent since the two-day sell-off following the UK's Brexit decision, possible market disruptions loom.PHOTO: BLOOMBERG

Analysts view such funds as key element of diversified portfolio

The post-Brexit market horizon is still shrouded in economic and geopolitical uncertainties, making the search for stable returns an increasingly challenging task.

For now, the shock surrounding Britain's decision to leave the European Union seems to have dissipated, with key benchmarks around the world putting up a multi-week rally. At ground zero, London's FTSE 100 has gained around 12 per cent since the two-day sell-off following the June 23 referendum.

But while global markets have quickly regained their footing, it is prudent to wonder how sustainable the run-up is and what surprises may lie ahead.

Multiple elections, including the US presidential polls in November and the German federal election by October next year, will be held over the next 12 to 15 months, and their outcomes may result in both short-term market disruptions and long-term political uncertainty.

Meanwhile, the prolonged slowdown in Asia continues, with China's stagnant growth weighing on business and investor sentiment.

Singapore's Straits Times Index is reflecting some measure of reservation, coming off its recent gains with a 2.5 per cent drop over the past two days, amid fresh concerns about the oil and gas sector after Swiber Holdings' demise.

Against this volatile backdrop, ensuring a diversified and tradable portfolio will be a priority for investors aiming for stable returns and income generation.

How to build that diversified nest egg is down to individual preference, but some market watchers have pointed to exchange-traded funds (ETFs) as an effective component.

An ETF is a passive fund that produces its return by tracking the performance of a stock or commodity index. ETFs are tradable like stocks. There are 83 ETFs listed on the Singapore Exchange, such as the SPDR Straits Times Index ETF, which tracks the STI, and the SPDR Gold shares ETF, which tracks bullion prices.

"The most important value-add of an ETF to a portfolio is that it provides an easy way to broaden the investment horizon and potentially generate higher returns than insurance and cash deposits," says Mr Sunny Leung, Asia ex-Japan ETF business development manager of State Street Global Advisors.

"At the same time, compared to investing in individual stocks, its diversified nature reduces risk and volatility by spreading your investments in a mix of stocks."

With market volatility looming, the demand for ETFs has shown resilience. SGX figures showed a 12 per cent year-on-year growth in ETFs' turnover value to $265 million last month. This was despite the lower overall market turnover value, which dropped 9 per cent year on year last month.

The top 10 most active ETFs have averaged a total return of 4.9 per cent this month, taking their one-year total return to 3.1 per cent. SPDR Gold Shares was the most actively traded ETF this month.

As ETFs are passively managed, a key feature is that the fees required are typically less than those of mutual funds, which also invest in a basket of stocks or bonds.

"Singapore investors can consider using ETFs investing in local assets as part of their core portfolio, while using overseas countries and other asset classes as a satellite portfolio to boost returns," Mr Leung adds.

Discussions and information on ETF investment will be part of the programme at the two-day Invest Fair 2016, starting today.

A version of this article appeared in the print edition of The Straits Times on July 30, 2016, with the headline 'ETFs 'can help cut risks amid market volatility''. Print Edition | Subscribe