Friday, August 28, 2009

One ETF to avoid (for now)

For many years Hong Kong has been plagued by a lack of low cost, no load index funds. Investors were faced with choosing between funds with outrageous front end loads and high expense ratios, searching for overseas products (which would often not be sold to Hong Kong residents) or doing it themselves. The typical equity fund charged around 5% front end load and cost about 3% pa to run - it is no wonder that Hong Kong had a relatively low penetration rate for such products.

Gradually this has changed, beginning with the the Hong Kong Tracker fund in November 1999. Deutsche Bank is the latest institution to list some ETF's on the Hong Kong stock exchange. As an investor, I view this as a very welcome addition to the range of products available to me.

There is one product in the range which I will avoid - the db x-trackers US Dollar Money Market ETF. The problem is simple - the current yield of 0.11% is so low that it cannot compensate for either the effect of the bid ask spread (HK$170.80 - $171.10 or 0.176%) or the typical transaction costs (brokerage, stamp duty etc) , let alone both of them combined, unless you invest for a very long period of time (years). In fact if you invest for long enough for the yield to exceed the spread and the transaction costs, you would probably do better with bank deposits and would definitely do better with short term bonds.

While I will consider adding some of the Deutsche Bank ETF products to my portfolio after I have completed the new property purchase, at current interest rates I will pass on the US Dollar Money Market ETF. If interest rates start rising I will revisit (but may well prefer to prepay mortgages in that scenario).

1 comment:

Lyn said...

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