In our monthly series featuring fund managers and leading market experts, Mr Chong Jiun Yeh, UOB Asset Management's chief investment officer of fixed income and structured investments, breaks down the pros and cons of the multi-asset fund and benefits of investing in exchange-traded funds (ETFs).
Some investors may be put off by the complex-sounding term exchange-traded funds (ETFs), but they are actually pretty straightforward.
And according to one investment expert, a significant advantage of ETFs is that they offer investors exposure to a wide range of asset classes.
Mr Chong Jiun Yeh, chief investment officer of fixed income and structured investments at UOB Asset Management, says: "These days, they are quite a popular investment instrument. Globally, there are about 5,200 ETFs listed, and they represent many asset classes, from the safer asset classes like fixed income and money market, to the higher risk types like equities and commodities."
ETFs track the value of an underlying asset, such as a stock market index, like the Straits Times Index, or a commodity such as gold. As the name suggests, these instruments are traded on stock markets just like stocks.
Mr Chong adds that ETFs have also become increasingly popular with institutional investors, who use them to replicate certain investment strategies.
Retail investors can buy into ETFs through UOB Asset Management's latest product, a multi-asset fund called the United Global Asset Rotator.
Mr Chong says retail investors can use ETFs to gain access to some markets that are not easy to invest in, including commodities or Chinese or Indian equities.
He notes: "ETFs globally, especially for the last five years... have seen exponential growth in terms of assets under management being attracted to invest in ETFs.
"Currently, we are talking about more than US$2.5 trillion (S$3.2 trillion) since last year."
Q:How should retail investors go about investing in ETFs?
They should look at two aspects.
First, evaluate the index. Look into how long the index has been around, how is it constructed, how are the components of the index weighted, how often is the index rebalanced, and the concentration of the index - some indexes are single-country, regional or global.
Second, evaluate the index structure.
Investors should look at who is the index provider, what is the replication methodology to track the underlying index, expense ratio, tracking error and liquidity on the market and over the counter.
Q: How should retail investors go about investing in US or Europe ETFs?
It's not that simple. In Singapore, quite a number of the Singapore ETFs are classified as specified investment products (SIPs).
It makes it harder for the local remisier to recommend ETFs because the client will have to do the financial assessment test.
For investors to invest in other exchanges overseas, the trading hours are different and investors have to really understand the ETF that they are investing in.
They can go through some of the brokers here that offer the trading platform for the overseas exchanges but, more importantly, it's whether the retail investor understands the ETF and has done the due diligence on the two aspects I mentioned.
Q: What are the benefits of investing in ETFs?
ETFs have an advantage over your conventional security, because of the multiple sources of liquidity available.
If you look at the SPDR S&P 500, it is the most liquid and has one of the largest market caps. It has a very low expense-ratio and very minimal tracking error against the S&P 500. It gives investors the performance of the underlying index that it tracks.
Given that it's most efficiently managed and has a lot of liquidity on the exchange, these are some of the characteristics we would look for in selecting the ETFs.
Q: With ETFs, should investors time the market or does dollar cost averaging still work better?
Investors will still have to look at their own risk profile, requirements and needs and do the necessary due diligence before even investing in ETFs.
Timing the market is rarely done right. If investors maintain the view that their investment merits are still intact over a medium- to long-term basis, they can add to their position or do dollar cost averaging.
Q: What are the pros and cons of a multi-asset fund compared with a single-asset fund?
The multi-asset fund provides exposure to a wide range of asset classes, and allows the investor to diversify his investment portfolio.
This, in turn, will mitigate the losses from the adverse performance of any particular asset class.
For example, the United Global Asset Rotator fund adopts a dynamic asset allocation approach by investing in ETFs. The fund will move around the different asset classes quickly and further reduce the risk of loss incurred from volatile market conditions.
A dynamic multi-asset fund is able to cushion the downside as compared to a single asset class or static, balanced kind of funds that are, for example, 60 per cent equity and 40 per cent fixed income.
Q: What can be done to encourage investors to take up ETFs?
If you look back at the last couple of years, ETF education has been on the rise in cooperation with the local brokerage houses and the stock exchange, which have been conducting regular seminars on basic ETF investing.
The awareness and usage of ETFs in Singapore have been on the rise. However, by the current regulations, there are still a number of ETFs classified as SIPs, which makes it harder for local remisiers and brokers to recommend.
This article was first published on Oct 5, 2014.
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