However, there are some places where actively funds might find it difficult to take positions in particular stocks due to trading regulations and cultural or liquidity barriers. China, Nigeria, Brazil and commodities are such examples, according to ETF Securities’ head of retail distribution, Frank Spiteri (pictured).
Both active and passive investments have their place but for investors that want access to hard to reach markets they think will rise it is better to keep costs low and not pay for someone to pick stocks, he says.
Whilst these markets have all suffered in recent years, mostly making losses, for investors looking for wide diversification to higher risk markets they all provide exposure in otherwise hard to reach places.
China
Despite a liberalisation of investment rules in Chinese equities the value of investing via an ETF in Chinese indices will only increase as the market becomes larger and more complex, according to Chia Chin Ping, managing director of MSCI China.
One of the oldest ETFs to offer exposure to Chinese equities is the iShares MSCI China which was launched in November 2001.
Since it was launched it has closely shadowed the MSCI China although this has been less so in the past five years.
The MSCI China has risen 288.04 per cent over the past 10 years whilst the fund has returned 255.79 per cent.
Performance of fund and index over 10yrs
Source: FE Analytics
However, over the past year - which has been a falling market for Chinese equities – the fund has lost less than the index. It made a loss of 9.98 per cent compared to a fall in the index of 10.18 per cent.
Only three actively managed funds in the IMA China sector made more than this over the same period: First State Greater China Growth, Invesco Perpetual Hong Kong and China and Henderson China Opportunities. However, the latter fund only beat the iShares MSCI China by two percentage points.
Performance of funds, sector and index over 10yrs
Source: FE Analytics
Nigeria
Africa is a high growth area that is particularly costly and difficult to access, Spiteri says and the Nigerian economy is particularly of note.
Nigeria recently overtook South Africa as the continent’s largest economy. It is also the largest oil producer and has the largest population in Africa.
One of the few exchange traded funds available is the Global X Nigeria index which tracks larger companies in the country.
It has made a loss since it was launched in April 2013 of 11.49 per cent, more than 3 percentage points than the loss in the MSCI Nigeria.
Performance of fund vs index since launch
Source: FE Analytics
The country is currently experiencing a major surge in terrorism, particularly in the north of the country weakening the region’s economy.
Brazil
Spiteri says despite recent turmoil in Brazil, the country may get a boost from inflows in the wake of the imminent World Cup it is hosting, and an ETF may capture this growth.
Several Brazil ETFs are available for access to the emerging economy, but Spiteri recommends the iShares MSCI Brazil index.
Since its launch in February 2010 it has lost 17.88 per cent, a better performance than the MSCI Brazil index, which lost 20.71 per cent.
Performance of fund vs index since launch
Source: FE Analytics
It has also performed better than the index in 2014 as sentiment has picked up for the country. Since the beginning of the year it has made 11.08 per cent whereas the MSCI Brazil index rose 9.07 per cent.
Commodities
Nearly all commodities are difficult to gain exposure to apart from with an exchange traded product, Spiteri says.
For investors who think a commodity such as oil or gold is likely to do well one way to gain exposure would be through a company involves in drilling or mining for that commodity.
However, Spiteri says this may not capture upside growth as whilst the commodities’ price may be rising, the company’s stock may fall.
ETF Securities’ has one fund that invests across commodities - the ETFS All Commodities.
Performance of fund and index over 3yrs
Source: FE Analytics
Over the past three years the fund has made a loss of 21 per cent, a greater loss than its benchmark the UBS Commodity index, which fell 18.8 per cent
Since the beginning of 2014, the outlook for commodities has improved with both the index and fund posting a positive return.
However the index rose slightly higher than the fund; 6.24 per cent compared to 5.84 per cent.
