An article in The Economist magazine this month describes low-cost, index-tracking Exchange Traded Fund (ETF) as the ‘investment equivalent of a puttering hatchback’.
And the article – headed Roaring Ahead – likens a hedge fund to investment’s "gleaming Porsche".
In what is tagged as a "victory for the humble", the magazine records how the total global assets of exchange-traded products have just overtaken the total assets of much higher-cost, more complex, longer-established and seemingly more glamorous hedge funds.
London-based specialist researcher ETFGI, which is quoted by The Economist, calculates that the total global assets of exchange-traded products reached US$2.97 trillion at the end of June – US$2 billion ahead of the total global assets in hedge funds.
As the researcher notes, this is "significant achievement" for exchange-traded products. While hedge funds have existed for 66 years, exchange-traded products had their 25th anniversary earlier this year.
The vast majority of exchange-traded products are index-tracking ETFs. (However, it should be emphasised that there are significant differences between some types of ETFs available overseas and in Australia.)
The Economist highlights two of the characteristics of index-tracking ETFs that are behind much of their burgeoning popularity. These are their extremely low costs and the sheer simplicity of their investment intentions. These two factors are, of course, indelibly linked.
The aim of standard ETFs is to simply mirror the returns of a chosen index – after allowing for their extremely low costs. There is no attempt to become involved in the typically high-cost, often-unsuccessful exercise of trying to pick winners or losers.
In a lower-return investment environment, the benefits of low costs should really standout.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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