Thursday, April 27, 2006

The Next Big Thing For Asian Exchanges (ex-Japan)
Exchange Traded Funds

ETFs are investment products that hold a pool of securities and are designed to generally correspond with a specific Index. Investors can buy and sell ETFs just like stock, through their broker, throughout the trading day. ETFs offer the advantage of trading an index portfolio with the ease of stock trading. Investors can purchase ETF shares on margin, short sell shares, or hold for the long term. Investors also achieve market exposure consistent with the Index on which they are based, through one security. ETFs are also designed to be cost efficient because they are based on an Index, rather than being actively managed. Designed to follow the NASDAQ-100 Index, QQQ tracks one-hundred of the fastest growing technology and non-financial services companies listed on The NASDAQ Stock Market. It is the most actively traded ETF in the world with 80-90 million shares traded daily.

Other popular ETFs on Nasdaq include: Nasdaq-100 Equal Weighted index, Nasdaq-100 Technology Sector Index, Nasdaq Biotech Index Fund, Basket of Listed Depository Receipts Emerging Markets 50 ADR Index, BLDRS Asia 50 ADR Index, BLDRS Europe 100 ADR Index, etc...

ETFs are extremely popular for players on Nasdaq. In just one exchange they can go long, short on almost any and every sector/index in the world. Of course I am kidding, but their options are quite enormous. They have energy ETFs, industrials, midCaps, smallCaps, US Energy, TelecomStocks, 20-Yr Treasuries, MSCI HK ishares, etc.. You need a sufficiently deep pool of players for ETFs to work well. In fact, ETFs on Nasdaq allows a lot of retail players and smaller funds to buy exposure to Asian stocks via country based ETFs, even sector based Asian exposure. Saves them from investing directly. So, in a way, Asian based ETFs suck away at actual real activity by foreign investors buying and selling directly in Asian stocks. A factor that must be taken into account when we try to tabulate trends on foreign participation in Asian exchanges.

Both HKSE and Singapore Stock Exchange have been working furiously over the past 2 years to come up with similar ETFs on their exchanges. To that end, SGX has edged ahead of HKSE. SGX's street TRACKS Straits Times Index Fund have done well. SGX has also launched the FTSE SGX Asia Shariah 100 Index (stocks that are shariah-compliant from Japan, Singapore, Taiwan, Korea and HK) - this will form a good kick-off when they actually launch its Asia Shariah 100 ETF. ETFs for exchanges like HK and Singapore cannot be domestic-themed, it has to have a broad appeal, an Asian appeal as well. The structure of a good ETF is derived from its indexation. The sooner an exchange can aggregate various sector, regional, country specific indices, the faster will be the rollout period.

In HK, they unknowingly launched their most successful ETF when the government bought stocks heavily to support the Hang Seng back in 97. Then, loaded up with primarily HK stocks, the government did not want to unload the whole chunck back onto the market. So, in November 1999, they launch the Tracker Fund of HK, possibly the most successful ETF in the world with US$4.3 billion in units raised. ETFs are better because they can be traded in and out (and even shorted) on low cost unlike most unit trusts.

Both HKSE and SGX have to realise that real ETFs allows themselves to be shorted, and that is a big attraction. That has to be dealt with properly by the two exchanges. The sooner an exchange can come up with a decent array of ETFs, the better the chance of being successful. It is not difficult, here are a few proposed ETFs: 1) Asia-15 Airline Fund 2) Asia Low Cost Carrier ETF 3) Asia 30 Power Plants ... plus an array of Asian country indices as ETFs.

There are now close to 200 ETFs in the US with around US$200 billion in capitalisation. In Canada its closer to US$8 billion in ETFs. In Europe there are about 130. Japan has the second largest ETF market with close to US$30 billion in value.

Both HKSE and SGX have been dragging their feet in venturing big time into ETFs. The potential is there for either of the premier Asian financial HQ to propel themselves ahead of the pack... with an Asian flavour. ETFs allow an exchange NOT to be only reliant on domestic companies for interest and investing options. Just design brilliant ones, using Asia as a platform. Any of you two want to hire me?

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