Esoteric ETFs: How exotic are they?


    When they first hit the market, exchange-traded funds (ETFs) were seen as the next big thing for investors who simply wanted to track an index at the lowest cost.

    For the most part, they were targeted at the institutional and professional investor market, but their exchange-traded nature makes them accessible to the everyday investor, while their lower charges draw in those who believe active management offers little advantage for the higher price.

    ETFs have been a strong growth story, particularly in the past 10 years. Currently, global assets under management in exchange-traded products (ETPs) – a catch-all term that includes ETFs, exchange-traded commodities (ETCs) and exchange-traded notes – amounts to $1.9tn, or £1.2tn, having grown from less than $200bn (£124bn) in 2002, says specialist research firm ETFGI.

    In Europe there are 38 ETF providers, but the lion’s share of assets are managed by the big 10: iShares, Source ETF, ETF Securities, State Street, Amundi, HSBC, Zuercher Kantonalbank, ETFlab Investment, Deutsche Bank and Julius Baer.

    Currently there are 1,012 ETFs listed on the London Stock Exchange (LSE). The first UK-listed ETF was the iShares to track the FTSE 100 index, launched in April 2000, and since then the market has not only seen an explosion in the number of funds available, but in the variety of markets and asset classes they track.

    That same iShares FTSE 100 ETF remains the most traded fund of its kind on the LSE with 167,984 trades in the first 10 months of 2012. But funds tracking more exotic underlying assets like gold and emerging markets have also ranked high in the statistics.

    It may be nothing new to see exchange-traded products investing in gold and other commodities, as many have done in the UK since the mid-2000s, but as the UK economy struggles to return to good health, investors are increasingly looking to different assets and new markets in order to generate returns.

    Serbia, the final frontier

    When stock markets crashed in 2008, investors noticed many of their assets were not behaving as they had come to expect. Rather than see their equity and bond investments move in different directions, they were more correlated than ever before.

    The situation was the same for equity markets all over the world. In the past it was believed certain emerging markets were immune to any malaise affecting the developed markets. However, globalisation and increasing interdependence among markets like China, the US and the European Union mean that investments in all of these regions are more correlated.

    As the developing markets of the past become more and more mature and begin to slow, investors are constantly seeking the new growth story. First, we had the Brics – Brazil, Russia, India and China – and now we have a varying group of countries known as the ‘frontier markets’. Index providers like FTSE, MSCI and Standard & Poor’s each have their own frontier market list of two dozen or more countries. The constituents range from Argentina to Serbia and Colombia to Vietnam.


    1. Frontier markets are also known as:

    2. The first ETF on the London Stock Exchange was:

    3. What article states one advantage of investing in physical gold ETFs is:

    4. Gold ETFs have been among the most-traded on the LSE

    5. Funds investing in gold mining company shares have better performance than physical gold funds

    6. Alan Miller at SCM Private says most investors are best-suited to:

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