Index Investing
Survival of the fittest
The speed of development of the ETF market is
staggering. The volume of sales in Europe doubled from
$200bn in 2003 to $400bn in 2005, before doubling again
to $800bn in 2007.
The range of products has changed from plain vanilla
propositions tracking the more mainstream FTSE and S&P
indices to being able to sector-pick within, or even short,
an entire index; the number of providers has grown to
include more than giants such as Barclays Global Investors
(BGI) to introduce niche providers such as SPA ETF.
One measure of the growth of the products is that we
are starting to see weaker offerings close. October saw
the largest number of ETF managers close their products,
according to the industry-wide BGI report, with Santander,
Bear Stearns and FocusShares closing their ETF
businesses. Year to date there have been 53 closures.
� The S&P 500 fell the most in a single month since the
crash of 1987; the Nikkei 225 fell 24%, the worst in its
58-year history.
� Many investors are afraid to take action and are sitting
on higher-than-average cash balances.
� Investors expressing concerns over the counterparty
risk and transparency of structured products using
swaps are showing a preference for ETFs where the
structure is a fund, more specifically ETFs that invest
exclusively in securities.
DECEMBER 2008 [www.portfolio-adviser.com] PORTFOLIO ADVISER
In this section…
Analysis
ACTIVELY MANAGED ETFs
“Such is the speed of change
that ETFs are bridging the gap
between active and passive
investment strategies,
pitfalls and all”
FIRST THERE WERE INDEX-TRACKERS… 38
“Simplicity, transparency and their relatively low cost made
index-trackers an attractive proposition over and above the
claims made by active fund managers”
…THEN THE FUNDAMENTALLY DRIVEN ETFs… 39
“It gets round the issue of an ETF that adheres to the strict
cap weighting of an index, by moving to a more active
choice of which stock to choose ranked by fundamentals”
…SWIFTLY FOLLOWED BY DERIVATIVE PROXIES
40
“The building blocks are available so that if someone wants
to short the FTSE 100 they can use a short FTSE 100 ETF
as an alternative to derivatives”
38-40
37
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