Powerful weaponry
Exchange-traded funds (ETFs) offer easy, risk-controlled and cost-efficient exposure to the world’s investment markets. A new breed ofsector ETFs is set to give investors even more power to implement their investment strategies. ETFs are still relatively new on the European investment scene. Simply put, they offer the investor exposure to an entire index of stocks, but trade just like an ordinary share. The best-known ETFs are based on country and regional indices such as the FTSE 100 index of leading UK shares or the Dow Jones Euro Stoxx 50. They allow investors to access a diversified range of stocks that can be bought like any other stock on a normal stock exchange. Trading throughout the day makes them more flexible than mutual funds, while total expense ratios as low as 0.35 per cent a year make them competitive compared with both futures and traditional index funds. Based on variety of indices The latest breed of ETFs focuses on European sectors and gives investors yet more flexibility in pursuing various investment strategies. They are sector-based, covering virtually the entire market from consumer staples to telecoms and utilities. They are based on indices from a variety of providers including FTSE, Dow Jones and MSCI. There are a large number of trading strategies that investors might pursue with sector-based ETFs. The most obvious is sector rotation. Sector rotation is very much a top-down strategy based on the idea that macroeconomic factors will affect different industries in different ways. In the past, a portfolio manager would have taken a position by buying a handful of favourite stocks in a favoured sector. ETFs allow that position to be taken in one simple trade with the added benefit of diversification, since sector ETFs hold up to about 30 stocks, rather than a handful. And, while individual companies can go bust, entire industry sectors rarely do. Globalised economy Globalisation is one of the key factors driving the popularity of sector-based investment. Traditional portfolio theory dictates that diversification can be sought by investing across a range of different countries. But in the globalised economy, countries’ equity markets tend to move together, eroding the diversification benefits of country investing. Sector investing is proving to be one way to regain some of this diversification potential – as the divergence in recent years between technology and telecoms stocks and the rest of the market has shown. Sector ETFs also make ideal instruments for tax-loss harvesting, core-satellite strategies and pair trades. The flexibility of ETFs means that how they are used relies largely on the creativity of the investor. And that is the most important point: although ETFs are new, they are less about implementing new investment strategies, and more about enabling investors to pursue existing strategies in a more flexible, cost-efficient and risk-controlled manner.
CONTACT: Robert Broadwell
Barclays Global Investors
Murray House
1 Royal Mint Court
London EC3N 4HH
England
United Kingdom
Tel: +44 (0) 20 7668 8452
Email: robert.broadwell@barclaysglobal.com
