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| This month marks the second anniversary of the launch of the ISEQ 20 Exchange Traded Fund (ETF), the first ETF of its kind in Ireland. Since its launch the product, which offers low-cost exposure to the Irish market, has performed well and is up about 50 per cent on its initial price. With plans afoot to launch other ETF products for Irish investors on the Irish Stock Exchange, Brian Healy and Niall Gibney explain ETFs and their benefits to investors |
Exchange Traded Funds (ETFs) are investment funds that are traded on an exchange and which hold a portfolio of securities, typically equities, tracking and aiming to replicate the performance of a specified index. ETFs trade like any other share and investors are therefore able to buy and sell shares in ETFs through any stockbroker at any time during the trading day. ETFs therefore provide investors with full visibility on price throughout the trading day in addition to flexibility in terms of intra-day subscriptions or redemptions to/from the fund.
According to Morgan Stanley there is currently in excess of $570 billion in assets under management (AUM) of ETFs worldwide and, during 2006, worldwide AUM increased by circa 39 per cent. In addition Morgan Stanley has recently estimated that the AUM of ETFs worldwide will exceed $2 trillion in 2011.
This level of growth in ETFs is being driven by an expansion in the number of institutional and retail users. Institutional users typically utilise ETFs to get exposure to the market while deciding on their precise stock allocations and to establish core holdings in certain markets or segments while retail investors value them as simple, low cost, flexible and easily accessible index tracking instruments.
A wider range of asset classes are now being covered by ETFs including commodities and fixed income as well as the ever increasing coverage of regional and emerging equity markets and market segments such as property companies.
On the Irish Stock Exchange (ISE) the ISEQ?20 ETF is available for trading. Launched in April 2005 the ISEQ?20 ETF tracks the ISEQ?20 Index which was specifically developed by the ISE for this purpose. The constituents of the Index are twenty of the leading Irish stocks based on free float market capitalisation and liquidity. The ISEQ?20 ETF therefore provides investors with easy access to Irish market return.
The ISEQ?20 ETF currently has E74 million (AUM) and year to date circa E1.7 million has traded daily on average in the ETF. The underlying index, as at 23rd March 2007, was up 57 per cent since its launch in April 2005 despite the recent equity market turbulence.Given the levels of AUM of ETFs globally there is significant scope for further growth in the AUM of the ISEQ?20 ETF and for ETFs as an asset class on the ISE.
Specific benefits, to both institutional and retail investors, of the ISEQ?20 ETF include:
• Very cost-effective, has a Total Expense Ratio (TER - an all inclusive measure of cost and expense) of 50 basis points per annum which compares extremely favourably to other tracker funds on Irish equities as well as to more actively managed funds.
• A tight bid/ask spread on the ISE, together with the absence of upfront subscription charges, minimises the costs of entry to the ETF especially when compared to other tracker funds on Irish equities
• Diversification: to achieve the same level of diversification an investor would have to buy the 20 stocks underlying the index
• No stamp duty is payable on the purchase of the actual ISEQ?20 ETF shares in the secondary market by investors (however 1 per cent stamp duty is payable by the ETF itself on the purchase of the individual stocks comprising the Index)
• Dividends paid to Irish resident individual shareholders are subject to the deduction of standard rate income tax only rather than the top rate as would be the case if the underlying stocks were held directly
• Receive one dividend rather than 20 (annual dividend yield of circa 2 per cent)
• Prices are updated continuously on the ISE throughout the trading day and trading information is published real-time which significantly increases price transparency and flexibility for investors when compared to subscription/redemption to/from other tracker funds on Irish equities
• The ETF has a liquidity profile comparable to the 20 stocks that make up the Index.
• No Irish Takeover Panel Levy on transactions in ETF shares
• A good starting point for retail investors wishing to invest in the Irish stock market
• Affords institutional investors the opportunity to allocate investment capital to the Irish market in one transaction
• Provides an easily accessible hedge against the Irish market
Potential product developments
As mentioned earlier in this article there is significant scope for further growth in ETFs as an asset class in Ireland. Options for the broadening of the ISE's product offering in this burgeoning asset class include ETFs tracking larger equity markets, emerging equity markets, property segments, commodities and fixed income. With the ISEQ?20 ETF now well established in the market an opportunity exists to provide Irish investors with access to a wider range of products on the ISE.
Summary
ETFs are simple and cost-effective investment instruments which provide numerous benefits to investors with global growth in AUM set to continue strongly in the medium-term.
In an Irish context, the ISEQ?20 ETF is a simple, cost-effective, transparent and flexible investment instrument which has significant scope for further growth in AUM. For institutional or retail investors wanting to establish a diversified portfolio of twenty of the leading equities traded on the ISE in one transaction the ISEQ?20 ETF provides an easy solution. For those with an existing Irish equity portfolio the ISEQ?20 ETF may provide an opportunity for further diversification or could constitute a very cost-effective core holding around which an overall investment approach can then be tailored.
Any further ETF product roll-out on the ISE would provide similar benefits to investors as well as making local, euro denominated access to other equity markets, market segments and asset classes available to Irish investors. |
Brian Healy is director of trading and regulation and Niall Gibney is market development manager for traded markets at the Irish Stock Exchange.
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| Article appeared in the April 2007 issue.
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