May. 29, 2009
Investors who want to participate in the economic growth of Greater China (PR China, Taiwan, Hong-Kong) could so far only choose between the rather expensive funds or try their luck as a stock picker. As a new sign that the spreading of ETFs (Exchange Traded Funds) is accelerating, the stock exchanges in Taiwan, Hong-Kong, Shenzhen and Shanghai want to collaborate to combine into a Greater China Index. This index is meant to be a benchmark for new ETFs, as Taiwan Stock Exchange Chairman Schive Che said.
So far, the access via ETF to the Chinese markets has been somewhat limited. One of the most popular indexes was the FTSE/Xinhua China 25 Index Fund. This ETF consisted of 25 of the largest and most liquid Chinese enterprises. All companies are listed on the Hong-Kong stock exchange. The joint project of the four large greater Chinese stock exchanges will especially benefit international investors who seek exposure to the Greater Chinese economic region. The new index is also an indicator that the financial and economic integration of Chinese mainland and Taiwan is making progress despite the ongoing economic crisis.
ETFs have been growing strongly over the last years. The average daily trading volume of ETFs worldwide has more than doubled to USD 125 billion (2008) from USD 60 billion (2007). Total assets under management in ETFs will exceed USD 1 trillion in 2009 and will grow to USD 2 trillion by 2012, as Barclays forecasted in a recent ETF report . The leading ETF providers have also seen net capital inflows over the last 12 months, a major difference to traditional fund managers who experienced a crumbling base of assets under management.
The surge in ETFs reflects that investors, now more than ever, favour transparency, low cost and liquidity when making investments. Another reason is that the vast majority of traditional managed funds have under performed vis-à-vis their benchmark index (this is the index which is used to measure if a fund manager is performing better for an investor than if the investor had just invested his money in the index).
ETFs are in most cases so-called passive index investments. This means that there is no active fund manager who picks stocks, bonds or other securities. Instead the ETF passively reflects a given index. The ETFs are listed on stock exchanges and investors can buy and sell them quickly, usually with a very narrow spread (difference between sell and buy price), in this way circumventing sales commissions (front load) of traditional funds.