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ETFs gain ground on futures for beta investing


Despite a 30 per cent equity market decline over the last three years, exchange-traded funds tracking eight popular equity indices, such as the S&P 500 and FTSE 100, have doubled in assets over the same period, a report by Deutsche Bank shows.

The report, from Christos Costandinides of Deutsche Bank, says investors are increasingly making decisions based on product functionality, instrument investment considerations, liquidity evaluation, investment holding costs and dividend considerations. In this context, they are finding that ETFs are an increasingly effective way to invest.

In a period of increased vigilance and risk surveillance, ETFs have gained ground on futures, especially with more conservative and medium sized investors such as pension funds and high net worth managers.

Futures and total return swaps still remain very popular with larger and more demanding investors.

The strong growth of the ETF market has brought with it an increase in the number of available products and benchmarks tracked.

In Europe, product count has tripled over the past three years from 447 in 2007 to 1,206 currently, and this has afforded investors with more choice. As a result, investors can often achieve more precise matching of their investment objectives.

Dividends, and how they are priced into a beta instrument as well as their seasonality pattern, can play a big role in an investor’s choice. ETFs in their large majority target total return indices and, as a result, accumulate dividends. Certain ETFs will distribute those back to their shareholders while others will automatically reinvest them.

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