31/12/2010 00:00 AST
An increasing number of investors in the GCC are using exchange traded funds (ETFs) as they look for low-cost ways to build and manage portfolios as well as gain exposure to a range of markets.
ETFs have been one of the great investment success stories of the past 10 years, according to iShares vice-president Robert Broadwell.
iShares holds the world's largest family of ETFs.
"ETFs combine the best features of index mutual funds with the trading flexibility of individual securities," he said.
"They have grown at an exponential rate as they offer diversification, low expense ratios and tax efficiency in a flexible investment that can be adapted to suit a multitude of objectives.
"The GCC has witnessed a growing interest in ETFs by professional investors who are attracted to ETFs for their simplicity, liquidity and low cost," he added.
"Before an investor can truly use ETFs strategically to maximise his or her return on investment, however, the investor should appreciate two key elements in using ETFs - total cost of ownership and the mechanics of trading the products.
"ETFs can be traded on an exchange or over the counter through a broker, via a direct market access (DMA) broker platform, or with an authorised participant (AP).
"DMA trading permits buy-side traders to access liquidity pools and multiple execution venues directly, without intervention from a broker's trading desk.
"An AP is essentially a broker with the ability to create and redeem ETF units, due to their direct relationship with an ETF provider," Mr Broadwell said.
"ETFs are inherently flexible because they trade intraday, so they can be bought and sold rapidly in response to market movements like regular stocks," he added.
"However, unlike many mutual funds, hedge funds or private equity funds, ETFs impose no minimum holding periods or sales charges when investors choose to exit their ETF holding.
"It is important that investors and their advisers understand the costs associated," Mr Broadwell said.
"The cost of an ETF has proven to be one of the key drivers for investors to take up the investment vehicle," Mr Broadwell said.
"A recent Morningstar survey of 1,000 investors found cost to be the main consideration for investors when choosing ETFs with more than 60 per cent of current ETF users citing low cost as a very important factor," he said.
"There are now multiple ETF brands tracking the same indices, so investors should consider the bid-ask spreads on-exchange when comparing various ETFs on the same index," he added.
"ETFs typically also have some element of tracking difference, defined as the difference in the performance of the ETF versus the underlying index.
"The skill of the ETF manager is key to minimising tracking difference, and investors should incorporate tracking difference in evaluating the total cost of ownership," Mr Broadwell added.
Gulf Daily News
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