Hello wide world

With the eurozone having left a nasty taste in the mouths of many, Elizabeth Pfeuti investigates what the rest of the world has to offer

They say it’s a small world and, for retail investors, it is getting smaller or at least more accessible.

As the eurozone crisis continues to wreak havoc on local markets, investors seeking shelter from high levels of volatility are putting their money to work further from home.

Flows into exchange traded funds (ETFs) tracking Asian, African and Australian indices started to rise at the start of 2010 and investors’ cash has been flooding in ever since. In percentage terms it is these regionally-based funds which have attracted the highest uptick in net new money, while investors have pulled money from indices following Europe’s largest stock markets, according to figures from industry data house Morningstar.

Assets in ETFs tracking Australian and New Zealand equities grew by more than 30 times, from about £7.53 billion (€9 billion) in January 2009 to £233 billion (€279 billion) at the end of January 2012. Over the same time period, assets in Asian equity trackers (outside of Japan) rose five fold, from £578 billion (€691 billion) to £2.72 trillion (€3.25 trillion). Meanwhile, euro-denominated money market funds, which hold short-dated, relatively safe debt instruments, have seen huge outflows over the past couple of years.

It is a sign of the times that assets halved over the past three years, from more than 8.37 trillion (€10 trillion) to £3.93 trillion (€4.7 trillion)at the end of January.

The story of tapping markets that are growing more quickly and with more stability is not surprising, but investors have already taken the next step.

Emerging markets, especially Asia, Africa and the Middle East have been very popular with investors. ETFs are ideal for them

Carl Beckley, Europe, the Middle East and Africa (EMEA) relationship management director for FTSE, which produces indices upon which ETF providers can base their products, says: “There are many regional ETFs, mutual funds and unit trusts that are based on indices, and currently there is an increased focus on strategy-based index products. Over the past three years, assets held in the sector-specific ETFs in the 16-strong Morningstar universe has almost tripled, from £2.76 trillion (€3.3 trillion) to £7.11 trillion (€8.5 trillion) at the end of January.

“Investors are using new strategies to gain exposure to new index methodologies that look to increase the return expected from a normal passive equity investment.”

Gareth Parker, index research senior director at Russell Indexes, which creates indices for ETF providers, says: “Demand for ‘themes’ has increased dramatically recently. Investors want to access the growth they can find in frontier markets, but their requests have gone beyond just geographical allocation.” Mr Parker says his firm was increasingly asked to create indices based on themes rather than a broad country index.

Unlike large fund managers, retail investors do not have the capacity to visit and explore new markets to hunt out opportunities in technological advancements – but ETFs have enabled them to do it.

Leonie Ryan, head of equity strategy at Tradition, says: “Emerging markets, especially Asia, Africa and the Middle East, have been very popular with investors. ETFs are ideal for them as it is very difficult to trade cash equities due to the market infrastructure - using ETFs is a much easier way to tap these markets.”

Mr Ryan says themed ETFs were already popular in the largest ETF markets Europe and the US. “There are risks associated with ETFs, just like any other investment products, but they are very liquid and there are more and more products becoming available for investors to be able to access new sectors in different regions.”

Ben Johnson, director of European ETF research at Morningstar, says ETFs offer retail investors the same opportunities as institutional investors have enjoyed for several years - and importantly at a similar cost.