The local bourse may see more exchange-traded funds (ETFs) in the second half of the year, allowing investors more options to diversify risks and boost financial efficiency, while authorities seek to invigorate the capital market, executives with securities firms said.
ETFs are securities that allow investors a convenient way to purchase a broad basket of securities in a single transaction and can be bought and sold during the day like common stocks.
“It is time the market launches leveraged, inverse and futures-based ETFs to inject a healthy dose of innovation and vigor, as it has become increasingly difficult for investors to make money due to ebbing market volatility,” Alex Huang (黃昭堂), a senior vice president at Yuanta Securities Investment Trust Co (元大寶來投信) told a forum in Taipei.
The TAIEX has an average volatility of 21 percent for the past decade and the spread for ETFs could double to 42 percent, as they allow greater investment flexibility when operated successfully, Huang said.
Securities authorities are studying the deregulation that would be required for new ETFs, which helped significantly raise transaction volume in South Korea and other markets, he added.
KGI Securities Co (凱基證券) senior vice president Richard Hou (侯東平) echoed the observation, adding that local equities funds comprised 72 percent of ETF assets in South Korea in 2012, while leveraged and inverse funds accounted for 71.5 percent of ETF transactions.
The availability of additional risky ETFs would give institutional investors more incentive to participate in ETF transactions, Hou said.
As of last year, there were 21 ETFs in the local bourse, with total assets of NT$139.73 billion, Taiwan Stock Exchange data said.
ETF transactions average NT$1.15 billion (US$4.63 billion) a day, accounting for 1.44 percent of overall trading, up from 0.17 percent in 2003, when the investment vehicle was first introduced.
Fuh Hwa Securities Co (復華投信) vice president Darren Hsu (許嘉榮) attributed the increase in popularity to low cost, better liquidity and higher returns associated with ETFs.
Because they are not actively managed, most ETFs have minimal expense ratios, making them much more affordable than most other diversified investment vehicles, Hsu said.
Whereas traditional mutual funds are priced at the end of the day, ETFs can be bought and sold at any time throughout the trading day, Hsu added.
Although exchange-traded funds offer several advantages over traditional mutual funds, they also have disadvantages, MasterLink Securities Corp (元富證券) senior manager Brian Chen (陳克平) said.
The securities that ETFs track are largely fixed, so investors who prefer active management will probably find ETFs unsuitable, Chen said.
Furthermore, because ETFs trade as stocks, each purchase will be charged a brokerage commission and transaction tax, Chen added.
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