Boosting revenues for Exchange Traded Funds
This week I would like to talk about Exchange Traded Funds (ETF) as it attracts more and more interest in recent months both from private and institutional investors. ETF is a low cost investment fund that replicates the return of major stock market indices like S&P 500, FTSE 100, FTSE 250 and others. Buying an ETF you might get an exposure to commodities, emerging markets stocks, commercial property, private equity. Price of ETFs depend on the demand for funds.
In addition, there are some special ETFs that replicate the performance of so called “fundamental based indices”, where ETFs follow a special investment strategy like tracking the companies with low P/E ratios, high dividend yield or maybe low debt to equity ratio.
So recently, based on a well covered FT article about Exchange Traded Funds I have found out that the assets held in ETFs increased by more than 25% over the past decade and it is expected further increase to reach $10tn by 2020. The reason for growing appetite in indexed based investments is that investors become more risk averse after 2008 financial turmoil. Therefore they are seeking more “reliable” investment products.
Despite the fact that ETF combine low charges (annual management fee around 0,3-0.5%) and tradability not all the ETFs are safe investments. Due to continuous financial innovation we might find “double leverage ETFs” which means that their price will increase two times when the index goes up or decrease two times when the index goes down.
To sum up, Exchange traded funds provide a good risk-return tradeoff for the investor. Are there any other reasons in your opinion which increased the appetite for index-based investments? Any shortcomings which should have been mentioned?
