The growing importance of ETFs stems from the fact that they offer investors one of the most efficient, cost-effective and convenient ways to access returns both from emerging markets and an increasingly wide range of other investment opportunities around the world.
The Biggest advantage of ETFs is that they are a convenient and cost-efficient alternative to purchasing all of the underlying securities of a particular index. Structured as a single security, traded on an exchange just like a stock, ETFs empower investors to access entire indexes in one go. Clearly, investors may wish to go for stockpicking funds, but this can be a risky approach, as you might fail to pick the right fund manager. Much of the interest shown in ETFs has come from the realisation that the vast majority of returns in any given investment portfolio result from long-term asset allocation decisions rather than short-term market timing expertise. In fact, academic evidence indicates that the majority of fund managers underperform their benchmark indexes. This is especially true during periods of high market volatility, for which emerging markets are noted. ETFs simplify the asset allocation process by giving low-cost access to particular indexes. This makes them the perfect ‘beta’ investment for investors who implement a ‘core-satellite’ investment approach. ETFs can also be used to give effective exposure to particular emerging market countries or regions, with the ability to rotate this exposure as and when required.
The big question mark now, whether in the next few years it would be a good move to take a stockpicker approach to emerging markets. At a roundtable discussion held by Lyxor ETFs on emerging markets, Robin Griffiths, a fund manager at Cazenove Capital Management and a noted technical analyst, pointed out that because emerging markets are going through an ‘awesome’ secular trend then this lends them to ETFs: if the secular trend is stronger than the cyclical one then a passive stance is better, while if the reverse is true, then it is better to have an active stockpicking approach. Market conditions in favour of owning ETFs are likely to change only slowly over several years, he said.
The growing of ETFs to access them can be seen from Lyxor’s own ETF data. The number of shares outstanding in Lyxor’s leading emerging market ETFs collectively increased by 86 percent over the twelve months ending June 30, 2009, especially impressive considering the extreme levels of volatility in these markets over the same time period.