Opting for exchange traded funds

INVESTORS may be better off buying an index fund and letting it ride as it is difficult to be a successful stock picker over the long run, says Bruno Lebeda, BNP Paribas Asset Management head of structured, indexed and asset allocation in Asia.

"Most investors are happy to believe that they can be smarter than the market by picking the right stocks and the right timing. In general, that's also what the retail investors think. They like the adrenalin rush by getting into the market directly, pick a few shares and watch their prices going up and down," Lebeda told Business Times in an interview.

"But it's well documented that over a long period of time, you are much better off investing in an index fund rather than just being a time or stock picker," he said.

"Pretending that you are going to pick the right stock and the right timing is pretty much like pretending that you can read the future."

Historically, over the long term, up to 90 per cent of active fund managers have failed to even meet the market performance, Lebeda said.

"And for that kind of performance, investors have had to pay more for management fees compared to investing in an exchange traded fund (ETF)."

ETF is essentially a unit trust fund that is listed and traded on a stock exchange and designed to track the performance of an index.

"You have to realise that at the end of the day, market returns are basically good enough for mainstream markets, unless you are going for alternative asset classes.

"If you don't have a strong conviction that stock A or stock B is going to perform, then perhaps you shouldn't buy stocks. You probably should buy index fund or an ETF instead."

Arguably, ETFs may overtake unit trusts, or mutual funds, in popularity, too.

Last year, amid the financial market meltdown, over US$200 billion (RM712 billion) exited mutual funds, while ETFs saw inflow of about US$300 billion (RM1 trillion), Lebeda said.

"In theory, if you put money in mutual fund, you would expect that the manager would be good enough to at least preserve your money when the market goes down. But that rarely happens in reality," Lebeda explained.

"So, some upset investors have came to ask themselves, 'Why would I pay 1.5 to 2 per cent fees and my money still wasn't better preserved than if I'd had invested directly in the market?' As a result, they exited the mutual funds."

Business Times