ishares way of future
Published in Courier Mail
by Erica Thompson
THEY don't play music, but iShares are set to rock the way Australians invest overseas.
A single trade opens the door to entire international stockmarkets or sectors and for less than you'd pay for a traditional managed fund.
Known more broadly as exchange traded funds (ETFs), they are one of the fastest growing financial products.
Their goal is to mirror the performance of a particular index – whether it be the US S&P500 or Europe's emerging markets.
You don't need a fund manager – they can be bought and sold directly on the ASX just like regular shares with fees ranging from 0.09 to 0.75 per cent, plus brokerage.
"Everybody talks about allocating offshore, but it hasn't been particularly easy, especially for small and direct investors," says Tim Bradbury, co-head of Barclays Global Investors Australia, which launched iShares here last month.
He says the iShares emerging markets fund, for example, "settles like a normal stock but gives you about 22 countries underlying that one iShare and about 550 stocks.
"Our job as an asset manager is to deliver the return of that index pre-fees to investors."
Wealth Within analyst Dale Gillham says iShares are basically managed funds listed on the stock exchange but more cost-effective.
"Because they're tracking an index they don't need to pay gizzilions of dollars for analysts to pick shares . . . so their fees are very minimal," he says.
"They're quite low risk because they are very diversified portfolios and they're a much cheaper way for the average consumer to get (international) exposure because they don't need to use a financial planner."
The first eight iShares cover big and small companies from both developed and developing countries, including the US, Europe and the Middle East.
A further six iShares with access to Asian markets, including China, Taiwan and South Korea, have since been added.
Another 12 are expected to be launched next year.
While their debut in Australia hasn't set the market on fire – trading has been thin and trouble in the US economy has seen prices fall – Barclays expects volumes to build up gradually.
A stronger Australian dollar has also highlighted the main risk with ETFs – shifts in currency. Any gains made from foreign assets will be eroded when returns are translated into local dollars.
"At this stage we've only bought unhedged iShares," Mr Bradbury says. "I think in time we'd like to help investors solve that problem . . . but investors do need to be aware that they are exposed to movements in the underlying currencies".
While diversification is important, Mr Gillham says investors should not feel pressured to go offshore when the local market is doing so well.
"Why would you 'di-worsify' your portfolio by taking money out of Australia and putting it somewhere else, especially when there's a possible currency risk?
"A buy and hold strategy in an (overseas) index portfolio during the past six years would have been a waste of time with our rising dollar."
Investors also need to remember ETFs are designed to replicate the index – not outperform it.
Nonetheless, Mr Gillham says they are attractive for Australians wanting to dip their toes in international waters.
