ETFs attractive in volatile times

Exchange-traded funds (ETFs) are an option for advisers seeking to complement an active investment approach and assist in dynamic asset allocation, according to Del Stafford, director US iShares 

Stafford's comments were part of a session on "Better Beta" at the Portfolio Construction Forum's 2011 Conference in Sydney. 

Discussion of the topic comes just weeks after Australia's corporate regulator warned about the risks surrounding some ETFs - particularly "synthetic" ETFs, which are not backed by the assets they are supposed to represent, but by a derivative such as a swap deal instead.

Chairman of Australian Securities Investments Commission (ASIC), Greg Medcraft, expressed concerns earlier this month that some advisers and investors may not fully understand enough about ETFs to make informed decisions. 

ETFs have been available in Australia for the last 10 years. Essentially, an ETF holds a basket of stocks, commodities or bonds and tracks an index, but is traded like a stock on the ASX. The funds were initially slow to catch on, with a quiet seven-year start. However, ETFs became more popular during and after the Global Financial Crisis, with assets shooting from around $1 billion in mid-2008 to over $4 billion by the end of 2010. 

"We are in a very volatile time period right now, and if you look back to 2008, you will see the buy-ins were super high, particularly across all of the traded securities," Stafford said. "ETFs in general have had a larger percentage bought in times of stress," he said. 

Morningstar (Chicago) director of ETF analysis Scott Burns agreed that adoption of exchange-traded funds in Australia is on the rise. He said Australian ETF products were moving away from cap-weighted equity funds, and had a long way to go if they were to reach a similar proliferation of AFT products as already seen in US and Europeans markets.