Source: BlackRock
Following a rollercoaster ride in financial markets through the second half of 2011, the bad news is that acute uncertainty will likely continue through the New Year. The good news is that individual investors have a well equipped toolkit in order to manage their portfolios even if markets remain extremely volatile.
We all know that professional investors and institutions can easily trade global markets around-the-clock. However, the advent of online brokerage accounts means that individual Singapore investors can also access major international stock exchanges simply and easily. As a result, they are able to react to events or economic news released during the European or US trading day.
The huge range of Exchange Traded Funds (ETFs) listed in the US and Europe provides Singapore investors with tremendous choice. Through ETFs listed in major financial centres they are able to express a view on almost any market or sector.
Such choice helps investors who use ETFs as a trading vehicle even when the underlying market is closed. For example, a Singapore based investor wanting to trade a basket of S&P equities is able to do so using ETFs listed on the Australian, Singapore, UK and US exchanges. The opening time of these exchanges covers a 21 hour time period that for Singapore investors starts at 7am. This means they can trade on new information relevant to US equities as it happens, even if New York is sleeping and they can’t access US equities directly.
This joined up nature of ETF listings, allowing investors to trade around the clock, is especially valuable during fast changing market conditions triggered by a particular event such as last year’s Japanese earthquake or a Middle East military coup. When such an event impacts markets, investors are able to react even though the underlying securities of the affected market are not trading
Interestingly, events such as the Japanese earthquake revealed a pattern where big changes in equity values were first indicated by the iShares ETF trading in another time zone from the underlying market. We observed a substantial shift in Japanese equity values as expressed through US and European-traded iShares which was later confirmed in the underlying market at the Tokyo open. In this case, investors who used the offshore Japanese equity ETFs can be thought of as having gotten a head-start on those who confined themselves to only dealing in the local equities.
We call this process “price discovery” and the impact is to provide a reasonable up-to-the minute proxy for true value. This global feature of ETF listings is useful for investors who want to hedge a portfolio in the face of changed market conditions. It is also a benefit for those investors who want to actively trade between different time zones.
With continuing volatility likely to be the one certainty for investors in the coming months, there has never been a better time to familiarise yourself with ETFs available both here in Singapore, and also on key overseas markets.
