Investors turn to ETFs for emerging markets exposure

Emerging markets have returned to investors' agendas with the traditional BRIC economies, led by China and Brazil, at the forefront of market recovery as the global economy moves out of recession.

Brazil, India and China (the "BICs" as opposed to the "BRICs") have been quickest to turnaround as swift and significant action by policymakers has taken effect.

With increasing confidence that we are now in a period of global economic growth, Asia, as the ‘workhouse of the world', can power much of this with Brazil benefitting from the resultant commodities demand.

Across 2009, retail investors have increasingly turned to ETFs as they seek simplicity, transparency and economy from investment products. Emerging markets ETFs are proving more and more popular as they combine these features with trading flexibility and handle difficult stock selection in foreign markets automatically through their index tracking nature.

From Barclays Stockbrokers perspective, investment trends in ETFs over the last year have borne this out. The general appetite for ETF products has increased remarkably. Between August 2008 and 2009, trading in ETFs increased 156%, with 57% more clients now holding the products and the overall value of ETF holdings up 130%.

In the emerging markets space this trend is even more apparent as investors trading in ETFs broaden their horizons. In August 2008, FTSE 100 and fixed income ETFs accounted for 52% of all ETF purchases. One year on and this has dropped to 25% with emerging markets, among others, filling the gap. The iShares FTSE/Xinhua China 25 was the fourth most popular ETF traded in August, closely followed by the iShares MSCI Emerging Markets and the iShares MSCI Brazil. Investments into iShares FTSE/Xinhua China 25 and iShares MSCI Brazil have increased 270% and 100% respectively between August 2008 and August 2009. Over the year, other emerging markets products such as the iShares MSCI BRIC 50, iShares MSCI Emerging Markets and iShares MSCI AC Far East ex Japan, have all seen trading increases of over 200%.

Des Byrne, Head of Barclays Stockbrokers, comments: "The emerging markets story has regained momentum with private investors this year, and although still led by traditional BRIC economies, predominantly China and Brazil, other economies are starting to be classified in this arena. Investors therefore need to diversify their investments to play this story well and the liquidity, transparency and overall simplicity of Exchange Traded Funds make them excellent instruments with which to do this.

"ETFs enable clients to get into a number of overseas markets or stocks through one investment, which is particularly useful when you are less familiar with a market but understand the opportunity. They also give clients investment control but combine this with the expertise of investment managers who are familiar with these markets and well versed in assembling the stocks or indices in one product. ETFs have thus become a staple part of many clients' portfolios, particularly as they look to complement UK market investments."