In a technology rich society, trading funds over the internet has grown in prominence over conventional methods of investing. In essence, the Exchange Traded Product (ETP) has grown up.
Once the new lower cost kid on the investment block, investors now increasingly look at ETPs to diversify their portfolios and boost their returns above the benchmarks set by market capitalization weighted indices.
Net inflows into ETP products reached $24.7 billion in December last year and total assets held in ETPs stand at over $400 billion in Europe. Barbara Vintcent, Managing Director at BlackRock South Africa, says the ETP industry has attracted more attention as it has matured.
According to Vintcent, retail and institutional investors are now using ETPs as effective low cost building blocks for diversified portfolios. “This is underlined by the fact that newer products have shown in many cases that they can outperform market capitalisation weighted strategies in the right market conditions. ETPs have evolved to focus on different sectors, geographies and asset classes such as commodities and property, meaning that they can help investors manage exposure to sectors, asset classes or regions,” she says.
Where is the money flowing?
There are almost 5 000 ETP products available globally, but US funds still dominate the market. Global assets under management in ETP products amounted to $2.36 trillion as at November last year, but US funds account for almost 71% and European funds for 17.5% of this amount. The Middle East and Africa account for 1.7% of global market share.
According to Vintcent, global ETP flows have also, to a large extent, been concentrated in developed market equities over the past year. “US equities have benefited from expectations of a recovery in the country’s economy and money has also started to return to European equity markets as the region’s economic outlook looks less bleak.”
She says ETP flows to emerging market equities have come under pressure in the latter part of the year, at first because of the US Federal Reserve’s ramblings about reducing its bond purchases, and then its ultimate decision to do so. “The Fed’s move has spurred a general withdrawal from emerging markets.”
The secret recipe
Vintcent says there is a misperception that passive investment management provides the manager with a set recipe which he or she simply has to follow. “This is not the case as there are complexities and decisions involved with managing a passive portfolio. Responding to index rebalancing is one of the ways in which index fund managers can add value. The choice of which manager to use for passive investments therefore remains an important one."
She also advises investors to carefully consider what they are exposed to when tracking a certain index. For example, investors seeking to gain exposure to “emerging markets” can choose to track either the MSCI Emerging Markets Index or FTSE Emerging Markets Index.
However, the MSCI index includes South Korea while FTSE does not. “This means that investors are exposed to different sectors in the emerging market space and a different set of risks. As markets and exposures are not uniquely defined or identifiable, there is a degree of subjectivity in their representation.”
ETPs in South Africa
ETPs are still relatively new in South Africa and uptake of passive investment products is still relatively low. Vintcent expects this will start to change as investors and advisers gain a greater understanding of the products and as the investing community grows in the country. “As the market continues to mature I would expect to see investors choosing to allocate more money to ETPs alongside traditional active products. For institutional investors, the low cost of ETPs mean they are efficient tools for a range of tactical strategies such as sector rotation, rebalancing and access to alternative asset classes.”
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