Exchange Tracking Funds Carve Out A Place Beneath The Australian Sun
Sydney Morning Herald
Monday February 25, 2002
They've taken off slowly but these investment vehicles are going places, writes Brian Robins.
With just two shareholders when it went public on the Australian Stock Exchange at the start of last week, the latest exchange tracking fund, the Listed Property Trust index, was in immediate breach of listing requirements.
Even so, it was given the green light, as there was a market-maker, in this case Salomon Smith Barney, to ensure trading liquidity in the issue.
The minimum size the ASX imposes on these funds is $15 million. The Listed Property Trust (LPT) index easily exceeds this by a factor of about three.
It is the third exchange tracking fund (ETF) in the local market managed by State Street Global. Others are managed by rivals such as Salomon Smith Barney.
After a slow start, tracking stocks are making their presence felt in the local market, although they have some way to go to reach the level of support they have in the US, which accounts for the bulk of the estimated $US103 billion ($201 billion) invested in tracking stocks worldwide.
Much of the global trading in tracking stocks is accounted for by trading in the so-called QQQ stock, an ETF of the top 100 shares traded on the US Nasdaq market, which trades high technology stocks.
The largest of the local ETFs is the ASX 200 Fund, which has a sharemarket value of $430 million, putting it just outside the top 150 stocks in the market. But with average daily volumes of $8 million, it has the largest relative liquidity of any ASX-listed stock.
The attraction of ETFs is the ready access they provide to the underlying index, without the risk of specific stock selection. For example, if you expect listed property trusts to rise strongly but don't have time to research which is the best bet, the LPT fund provides sector performance without the risk of ending up with the dog of the sector.
``The most successful of the tracking funds are those which track the most widely traded indices the S&P 500, the Dow Jones Industrials and the Nasdaq composite," says Kris Vogelsong of the ASX. ``And we're seeing that locally."
Initial support for these products, especially the ASX 200, came from offshore investors, reflecting their longer history with these products. However, local institutional investors are following.
Many local fund managers track their own performance against the ASX 200 and, as well, the futures contract covers the ASX 200, giving it further focus for institutional investors.
The market value of the newer ASX 50 fund is only $28 million, putting it behind the LPT fund, now valued at about $40 million.
The advantage of tracking stocks over futures is that investors gain the dividend paid by the underlying stocks in the fund and also avoid the quarterly roll-over of positions that occurs with futures.
The advantage of futures is that they provide the investor with considerable leverage to the sharemarket's movements.
The additional attraction of these tracking stocks is the low management expense ratios of just 0.286 per cent for the ASX 50 and ASX 200 funds, and 0.4 per cent for the LPT fund. Most mutual funds charge more like 2 per cent.
There are several similar products on the sharemarket, most of which charge management fees of as much as 2.1 per cent.
This is typically for funds which boast active management, rather than simply mimicking the performance of the underlying indices.
After the ASX 200 fund, the next largest is the Commonwealth Diversified Share Fund, at $74 million, which aims to perform in line with the broader market.
The ASX is thinking of permitting short trading in tracking stocks, which would boost their attraction for institutional investors while boosting trading liquidity.
``The ETF is in many ways a natural competitor to futures contracts," says James MacNevin, director of State Street Global Advisors Australia.
``Longer term, it is more attractive than futures, as there is better tracking with the underlying index and, with futures, there is the quarterly rollover, where you have to pay, and there is the spread for that, as well."
ETFs also offer investors income from the underlying investments. This is not captured in futures contracts.
For example, State Street Global pays dividends half-yearly on the ASX 50 and ASX 200 funds, and quarterly on the LPT fund.
© 2002 Sydney Morning Herald