Anyone who is interested in wealth management will have come across the term ‘ETF’ whilst trawling through the online sphere for investment advice. If you are looking to diversify your portfolio with exposure to an entire market segment or stock index, then Exchange Traded Funds (ETFs) are a fantastic option. They are said to ‘work like mutual funds but trade like stocks’, and they are certainly very useful financial instruments in that they allow long term investors to spread risk and wait for broad market value appreciation. If you neglect ETFs within your investment portfolio then you are definitely missing out! Here’s why:

 

As ETFs are essentially wide ranging funds which are traded on stock exchanges, they are available at the click of a button via your stock brokerage account. In buying them you won’t have to deal with too much paperwork and the expense ratios will most likely be very low. History shows that ETFs are preferable over regular mutual funds in terms of providing long term gains. Throsten Machalik, Head of Deutsch Bank’s X-Trackers ETF unit, points out that “they are very transparent, cheap and easy to liquidate. Furthermore, our research shows that although some fund managers can outperform the market in the short term, over a period of 5-10 years, the markets (and therefore ETFs) tend to beat them”.

 

In today’s global economy, it is incredibly important for you to be a global investor. By purchasing ETFs you can bypass investment restrictions with relative ease and you can also choose a certain section of the Chinese economy within which to allocate your capital. For example, New York based fund manager Global X offers an extensive range of specialised ETFs including the China Consumer ETF (NYSE: CHIQ), China Technology ETF (NYSE: CHIB) and China Financials ETF (NYSE: CHIX).

 

Whilst it is possible to invest in stocks traded on the Vietnam Stock Exchange, for example, it is very challenging to do so without travelling to the country, and ultimately the costs would often outweigh the benefits. That is why the Vietnam Market Vectors ETF (NYSE: VNM), which mirrors the performance of the country’s entire share index, is a particularly useful investment tool. 

 

Such ETFs tend to be especially valuable when investing in emerging economies because they spread the risk and somewhat reduce the unknown factors when picking out individual value stocks. Indonesia and the Philippines would be great cases in point here. Despite the enormous growth potential, these nations are relative newcomers to the Asian economic boom and are arguably more difficult arenas in which to identify single, stable growth stocks than in the more mature markets elsewhere in the world. It would make sense to bet on the performance of the stock markets as a whole via the Market Vectors Indonesia ETF (NYSEARCA: IDX) and the iShares MSCI Philippines Investable Market Index Fund (NYSE:EPHE) respectively.

 

If there is one principle that underpins most investment strategies it is the idea of spreading the risk in order to minimise the losses. Additionally, if you feel that a particular industry as a whole is severely undervalued at current market prices, but you are not sure which stocks are most likely to provide the best growth opportunities, consider using a sector-sweeping ETF. You can find plenty of them in all sectors ranging from energy and consumer goods to finance and real estate. There are also a range of options which offer broad exposure to more niche sectors such as healthcare, commodities, technology and telecoms.

 

And, of course, it isn’t just diversification that maintains your financial well being; you also need to look for some dividend based income along the way! The good news is that if you do your homework there are plenty of great ETFs that are built with the aim of returning both high levels of income and steady capital appreciation for investors. A popular example would be the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG) which historically yields 2-4% and has seen a strong 12% appreciation over 2012. And that is a relatively conservative play compared to emerging market superstar funds such as the MSCI Singapore Small Cap Index Fund (NYSEARCA: EWSS), which in the past has yielded a staggering 20% dividend. The simple fact is that it pays to wait!

 

 

 

Stocks and Shares

 

Global stock indices, particularly in Japan and the UK, have been rallying in recent months as risk appetite amongst investors improves. On the whole, analysts are predicting a strong year in 2013 for Asian, North American and even European stock markets. But with such big issues such as debt worries and austerity measures quietly simmering away, it will be surprising if there aren’t any significant corrections over the coming months.

 

Many major economies around the world, including France and Germany, reported further declines in gross domestic product during the last quarter. Whilst equity investors seemed relatively undeterred by the poor GDP figures, poor earnings figures for early 2013 hit a number of big companies hard. Wal-Mart is one such firm which, after releasing sales data for early February, shed several percentage points on its share price.

 

Fashion designer Michael Kors announced in late February that he will sell some of his stake in his namesake high-end clothing firm after share prices hit an all time high. The stock has become a hot favourite for many investors following a string of positive earnings figures from the company. Since its IPO in December 2011 the fashion house’s share price has almost trebled in value despite continued worries about consumer spending.

 

Chinese firm Cnooc Ltd have had their landmark bid to take over Canadian oil giant Nexen approved by regulators and now look set to reach a final deal very shortly. The USD 15.1 billion deal will be the largest foreign acquisition in China’s history and is part of the ongoing strategy by the resource hungry nation to secure its future growth by investing in commodities around the globe.

 

In a move that most everyday investors didn’t see coming, prolific investment group Berkshire Hathaway announced that they will buy iconic food company H.J Heinz Co for an estimated USD 28 billion. The buyout, which will also involve Brazilian investors 3G, is set to be one of the industry’s biggest buyout deals ever. Analysts are expecting Heinz stock to go much higher in the coming year or so as a final deal is reached.

 

Currencies were reportedly a hot topic at the recent meeting of G20 finance ministers. The head of the ECB (European Central Bank) was keen to dismiss rumours that the world is on the verge of a ‘global currency war’ as several nations, most notably Japan, have been taking steps to weaken their currency in recent months. The big faller towards the end of February was the Pound sterling, which fell to an almost historic low against the Chinese yuan after it emerged that the Bank of England’s current governor lost a landmark vote on further monetary stimulus for the stagnant British economy. In other news, the German Chancellor stated publicly that the current valuation of the Euro was ‘fairly normal’. The Euro, which has looked slightly stronger going into 2013, may be in for a rocky few months as threats of a Cyprus debt default, the results of the Italian election, and the ongoing economic woes in the Eurozone will impact heavily on investor sentiment.

 

Perhaps the biggest commodities story in global news this month has been the US government’s announcement that the development of the Keystone Pipeline will reduce oil prices significantly in the coming decades. The controversial project, which involves technology known as ‘fracking’, will have energy investors talking for the foreseeable future and may have an impact on crude oil returns as the project gets underway. Gold fell to a 6 month low on 20 February to lees than USD 1,600 an ounce as investors are moved towards equities on hopes of a global economic recovery. Many analysts are predicting an upturn in the value of industrial metals as key economies such as China and the US look to be gaining increased momentum.  Iron ore in particular has been performing better so far this year. 
 

By Josh Cooper