There are a variety of Exchange Traded Funds (ETFs) available in the market today. ETFs aim to allow investors to invest in a diversified portfolio at a relatively cheaper cost than mutual funds. However, many Asian countries do not have an ETF industry yet. The advantages and disadvantages vary from country to country due to various factors such as regulations and economies.
Trading ETFs in Asia
In some Asian countries, the trading volume on ETFs increases, which is a positive sign for this investment instrument. However, in other countries, there has been no real development for this type of investment instrument to date. If one examines the ETF industry in Asia closely, Iit will be apparent that most Asian governments have not taken any action towards encouraging this investment tool. The main reason would be the lack of awareness among investors, which leads to downward pressure on ETFs’ prices.
On this basis, there are both advantages and disadvantages associated with ETFs in Asia. According to research conducted by Standard & Poor’s (S&P), worldwide ETF assets grew at a compound rate of 21 per cent reaching US$1 trillion in March 2013. As seen above, it is clear that many countries have yet to encourage or show interest in establishing an ETF industry due to various reasons such as increased volatility and lower liquidity. Hence, it becomes essential for each Asian country to consider their unique situation before deciding whether they should allow the trading of ETFs within their region.
What is an ETF?
Before going any further, it’s essential to understand what ETFs are. An ETF is created when a large sum of money is pooled by an investment firm from many investors and directed towards buying securities such as stocks or bonds in bulk quantities. This means that unlike mutual funds, which can only be traded at the end of every day, ETFs can be bought and sold anytime the exchange is open.
Advantages of Exchange Traded Funds in Asian countries:
- ETFs provides a way for investors to diversify their portfolio without incurring too much risk.
- Have relatively cheap management fees compared to mutual funds
- Performance depends on market conditions, which means it can generate high returns when the market is going up and vice versa.
- ETFs offer easy access into markets that usually have low barriers to entry, such as oil futures contracts, commodities, and forex, opening new investment opportunities to the general public that would otherwise be reserved for wealthy and experienced investors.
Disadvantages of Exchange Traded Funds in Asian countries:
- ETFs are traded via an open exchange; therefore, they are subject to the risks associated with investing in such markets. For example, the bid-ask spread represents the difference between the bid price and ask price, which could vary significantly during high volatility or low liquidity periods. This means that investment could be lost if the investor cannot sell their shares reasonably.
- Asian investors are less familiar with investing in ETFs, which could lead to downward pressure on prices because there is no significant demand for these investment products yet.
- There are not enough financial products available for ETFs.
- ETFs offer a more democratic trading system, and they also give rise to unethical behaviour such as mis-selling and market manipulation by both individual traders and large financial institutions.
- Rather than traditional mutual funds, which only invest in securities, ETFs often invest in derivatives such as commodities and currencies. Derivatives are complex instruments that can lead to high levels of risk due to the possibility of unlimited losses for little gain.
- Reinvesting dividends or other distributions is not possible with ETFs like with mutual funds.
Finally
The advantages of ETF trading usually outweigh their disadvantages. ETFs charge lower management fees than most other investment strategies and allow investors easier access into markets that used to be reserved for only high net worth individuals, albeit with some exceptions. Before investing real money, new traders should use an experienced and reputable online broker from Saxo Bank.
