Geoff Howie of SGX discusses what investors should be looking for and thinking about in relation to ETFs, and explains how they can assess which products are most suitable.

Date: Aug 2011

Tags: ETFs, Portfolio construction

• The type and structure of the ETF will depend on the experience and risk appetite of the individual buyer
• ETFs are not a product which should be seen as providing excessive returns for high risks
• When looking at core-satellite, investors can look more broadly than at just using ETFs by looking at including all assets

If an individual’s risk appetite is conducive to the risk of a particular ETF, then they should embrace the product, said Geoff Howie in an interview.

Given that the information provided on ETFs is available equally to individuals as it is to institutional investors, individuals have the same opportunity to participate, he said.

The type and structure of the ETF, however, will depend on the experience and risk appetite of the individual buyer.

For example, explained Howie, if the appetite for risk is low, an investor might start off buying a more temperate, fixed income-style ETF, or one which is tied to a stock market index – rather than a commodity-based or sector-specific ETF.

Context for buying ETFs

When buying ETFs, investors need to take into consideration where the product has come from and what it is trying to achieve, said Howie.

To put it in context, he explained that ETFs essentially put the benefits of mutual funds into an exchange-provided, bid-and-offer pricing structure which reflects the price supply and demand of an asset within the global investment universe – and available to anyone, anywhere in the world.

ETFs are not a product which should be seen as providing excessive returns for high risks, he added.

Building a core-satellite portfolio using ETFs

When looking at core-satellite, investors can look more broadly than at just using ETFs by looking at including all assets, said Howie.

For example, an investor might want to participate in China’s CSI 300 via an ETF, but might also want to access the internet sector in China. So they could pair their ETF trade with an ADR for one of the relevant companies.

Futures also work together with ETFs in terms of core-satellite portfolios, he added, where traders try to spread the coverage of the investment by using multiple assets.

Further, said Howie, investors who have a view on some type of sector-led outperformance relative to the underlying index could look to buy more or sell some of the stocks which they think will outperform or underperform respectively.