ETF investing in Asia is proliferating, with an increasing number of ETFs available to investors. Emerging markets are a significant focus for these funds, and investors can gain exposure to the region’s most compelling opportunities while minimising risk and transaction costs. Regional trends have also shifted towards actively managed strategies as more sophisticated investors look to capitalise on short-term market movements.
Emerging markets offer a diverse range of investment opportunities across multiple asset classes. Many ETFs are explicitly designed to provide exposure to stocks and bonds from emerging markets, allowing investors to diversify their portfolios at low cost. For example, one popular ETF for Asian emerging markets is the iShares MSCI Emerging Markets Asia Index Fund (EEMA). This fund consists of stocks from seven Asian countries, including China, India, Indonesia and Thailand.
Regional solid economic growth has also created attractive opportunities for investors seeking short-term gains. Many ETFs focus on specific industries or sectors such as technology, consumer goods, financial services and healthcare. These funds can provide exposure to stocks with a higher risk profile than traditional investments but could offer higher returns over the long term. For example, the iShares MSCI Asia ex-Japan Information Technology Index Fund (AXTI) is designed to track the performance of companies involved in information technology across developed Asia markets outside of Japan.
In addition to sector-specific ETFs, there are also broad market indices that offer exposure to regional markets. The iShares MSCI Asia ex-Japan Index Fund (AAXJ) is designed to track the performance of stocks from developed markets outside of Japan, making it an excellent option for investors in Singapore seeking exposure to multiple Asian countries with one fund.
As ETF investing in Asia becomes increasingly popular, more sophisticated strategies emerge. Active management is becoming increasingly popular as some investors look to capitalise on short-term market movements or exploit price anomalies across different asset classes and regions. For example, the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM) uses quantitative-based strategies to identify attractive investments across various sectors and markets. This approach could offer higher returns for those willing to take on greater risk.
Investing in ETFs is a popular option for many investors. However, it is essential to understand the associated risks. Fund performance can be volatile due to several factors, including market conditions, sector-specific events and geopolitical risk.
One of the main risks associated with investing in ETFs is liquidity risk. Depending on the liquidity of the underlying securities, it may be challenging to convert the holdings into cash quickly without incurring substantial losses. Additionally, when markets are volatile, liquidity may dry up rapidly, leading to higher bid/ask spreads and less favourable prices.
Another critical risk related to ETFs is counterparty risk, which refers to the risk that an ETF sponsor or other intermediary may fail to fulfil their obligations under the agreements they have in place with investors. In cases of counterparty failure, investors could experience significant losses due to delays or disruptions in trading and redemptions, as well as asset losses or dilution from bankruptcy procedures.
Tax considerations should also be considered when investing in ETFs, as capital gains taxes are applicable when holdings are sold at a profit. Investors should also consider any commission fees, management fees or other costs associated with trading ETFs, as these could reduce overall returns significantly over time.
Tracking error is another potential issue for investors in ETFs. Tracking error happens when an ETF does not replicate its benchmark index precisely due to differences between the benchmark and actual portfolio holdings, transaction costs and other factors. As such, investors should select funds that closely match their desired exposure before investing and keep track of any discrepancies on an ongoing basis.
ETFs offer a cost-effective way for investors in Singapore to gain exposure to emerging markets in Asia and take advantage of the region’s growth potential. Moreover, as investor sophistication increases, more sophisticated strategies such as active management are also becoming available, providing opportunities for those willing to take on higher risk. ETF investing in Asia is an attractive option for investors looking to capitalise on regional trends while mitigating the risks associated with stock market volatility.