ETFs: Another option in diversification

The Singapore Exchange (SGX) booked an average of $10.4 million in ETF trade each day in the whole of last month, up 35 per cent on October.
The Singapore Exchange (SGX) booked an average of $10.4 million in ETF trade each day in the whole of last month, up 35 per cent on October.PHOTO: ST FILE

As well as multi-asset funds, exchange-traded funds (ETF) are another financial tool that can offer investors exposure across a variety of asset classes.

An ETF is a tradeable product that tracks the price movement of a basket of assets, such as stocks, bonds, commodities and financial markets. It trades like a common stock on a stock exchange, which means that its price is exposed to the market's up-and-down movements throughout the trading day.

The key objective of an ETF is to allow investors to diversify over an entire sector or market segment with just a single investment.

And global demand for such products has been "explosive" since they were launched in the 1990s, according to Mr Bryon Lake, international head of ETFs at JPMorgan Asset Management.

He cited data that showed ETF assets under management worldwide amounted to nearly US$3.5 trillion (S$4.7 trillion) last year, likening the growth to that of Internet users.

"There's never been a rolling five-year period globally - in the US, in Europe, or in Asia - where ETF assets haven't doubled," Mr Lake told a recent conference, adding that ETF usage will continue rising.

At home, ETF investments have been picking up as well. The Singapore Exchange (SGX) - home to about 80 ETFs - booked an average of $10.4 million in ETF trade each day in the whole of last month, up 35 per cent on October.

The SGX listed the top five traded ETFs last month: iShares MSCI India, SPDR STI ETF, DBXT MSCI AC Asia ex Japan ETF, SPDR Gold Shares, and the newly listed Lion-Phillip S-Reit ETF - the first ETF to track a basket comprising solely Singapore-listed real estate investment trusts.

The SPDR STI ETF, with a return of 22.51 per cent this year as of Nov 30, is one of two ETFs listed here that tracks Singapore's benchmark Straits Times Index.

Fund managers in recent months have unveiled a raft of new ETFs in an aggressive bid to ride on the growing demand. JPMorgan Asset Management, for instance, has rolled out its first two European ETFs and five single-factor equity ETFs in the United States.

The two European ETFs, in particular, are aimed at offering investors exposure to the investment characteristics typical of hedge funds by using alternative beta strategies.

They are designed to provide access to the potential diversification and risk-return efficiency for which hedge fund strategies are valued - "in a more liquid, transparent and cost-effective format", said JPMorgan Asset Management in its press statement in October.

The JPM Equity Long-Short UCITS ETF focuses on long-short exposure to factors like value, quality and momentum within developed global equity markets by taking long and short positions in individual equity securities.

The JPM Managed Futures UCITS ETF looks at providing systematic exposure to carry and momentum factors across four asset classes - equities, fixed income, currency and commodities. Both ETFs are listed on the London Stock Exchange.

"We continually hear from investors that they are looking for proven strategies that can provide diversification benefits in their portfolios," said Mr Lake.

"Both the managed futures strategy and equity long-short strategy have historically had a low correlation to equities and bonds. We believe they will serve as useful tools to help investors build better portfolios."

A version of this article appeared in the print edition of The Sunday Times on December 10, 2017, with the headline 'ETFs: Another option in diversification'. Print Edition | Subscribe