ETF: An alternative investment for cutting risk in volatile times

One option meeting this need is ETF (Exchange Traded Funds).

ETF is an investment fund traded on stock exchanges. Shares in ETFs can be bought and sold at real-time prices, like trading stocks on a securities exchange through a broker-dealer. Most ETFs are index funds that hold securities and replicate the performance of an index.

ETFs are popular among investors because of their low costs, tax efficiency, and stock-like features. ETFs provide an economical way to rebalance portfolio allocations. ETFs also offer exposure to a diverse variety of markets, including broad-based indices, broad-based international and country-specific indices, industry sector-specific indices, bond indices, and commodities such as gold and oil. One famous ETF oil fund is PowerShares DB Oil Fund (DBO), which is based on the DBIQ Optimum Yield Crude Oil Index Excess Return. This is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and is intended to reflect the price movement of crude oil.

In Thailand, there are several types of ETFs listed on the SET, including equity ETFs (TDEX invests in the 50 largest capitalised SET index stocks and tracks the SET50 Index performance, while ENGY invests in energy and utilities stocks and tracks the performance of the SET Energy & Utilities Index), bond ETFs (ABFTH invests in Thai bonds and is underpinned by the iBoxx ABFTH Index), and gold ETFs.

ETF is an efficient investment tool, especially in an uptrend market, where investors contribute to or receive a basket of securities of the same type and proportion as the underlying index. Therefore investing in an ETF is a good way to diversify risk and protect your portfolio against negative impact from investing in individual stocks.

Currently, there are only a few ETFs in Thailand. An alternative way to invest in ETFs is through the Foreign Investment Fund (FIF) in Thailand. Investors purchase and redeem shares of foreign ETFs through the FIF at net asset value (NAV) at the end of the day, similar to traditional mutual funds. Some FIFs invest in well-known foreign ETFs, such as SPDR S&P500 ETF, which invests in 500 large-capitalisation common stocks actively traded in the US, and tracks S&P500 Index performance. Alternatively, the Hang Seng Index ETF invests in stocks that represent about 60 per cent of capitalisation of the Hong Kong Stock Exchange, and tracks the Hang Seng.

ETFs are typically designed to track the performance of certain indices, market sectors, or groups of assets, but they contain risk. Before making a decision to invest, investors should be aware of the risks and be prepared to bear loss and volatility associated with the underlying index or assets. Investors trading foreign ETFs with underlying assets in foreign currencies are also exposed to exchange rate risk. Currency rate fluctuations can adversely affect the underlying asset value, also affecting the ETF price. If investors need to limit the currency exchange risk, they should invest in foreign ETFs through the FIF with a full hedging policy to avoid currency fluctuation. 

 

Ladawan Charoen-Rajapark is managing director of Asset Plus Fund Management.