Daryl Guppy explores Exchange Traded Funds: investment profile, risk parameters and trading opportunities.

Exchange Traded Funds (ETFs) have grown rapidly since the Global Financial Crisis because they offer investors and fund managers a convenient way to bundle market exposure and deliver a baseline market performance in a fund. Total assets in ETFs in the United States now exceed $1 trillion, up 26 per cent since 2009. It’s very big business, and with profile and success come problems.
ETFs have changed as they have become more popular. This has changed their investment profile, risk parameters and trading opportunities. The way ETFs are best incorporated into a trading or investment strategy has changed significantly. ETFs still provide global exposure and diversity, but they are not the rock of stability and low volatility that many people like to have in their portfolios. The changes have been rapid, and retail investors are in danger of listening to the echo of a speeding train that has already passed them by and changed direction.
However, the changes offer opportunity, though often at the expense of those who have not updated their thinking about ETFs.
Classic thinking, and ETF promotional marketing, list the following benefits of ETFs:

• The risk profile is the same as market risk
• Instant diversification – the structure of the ETF means that as stocks are dropped from the index they are also dropped from the ETF. The ETF simply trades with the leading stocks in the market that make up the index.
• Global diversification, using a single ETF to benefit from a single market.

Let’s look at the way this market has changed – and at some cautionary notes.

Excerpted from an article originally published in the Mar/Apr 2011 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2011, Your Media Edge Pty Ltd.
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