Today's comment is by Eric Roseman, Investment Director for The Sovereign Society and editor of Commodity Trend Alert.
Dear A-Letter Reader:
The majority of investors are probably very familiar with U.S. Exchange-Traded-Funds, or ETFs. The United States remains the epicenter of exchange-trade-funds with the S&P 500 Index, or SPIDERS, home to $50 billion dollars in assets - the largest ETF in the world. ETFs in the United States now manage $296 billion dollars as of December 31, 2005, and remain the fastest growing segment of the mutual fund industry over the last five years.
But a whole universe of ETFs also trade across the Atlantic in Germany and France. Though many products are similar, European-listed ETFs offer one major advantage to U.S.-listed ETFs - all of these exchange-traded-funds are traded and denominated in euro.
Exchange-trade-funds provide low cost indexing across sectors, countries and even commodities while also levying much smaller annual management fees than actively-managed mutual funds. In the long-term, ETF fees can save an investor a small fortune: the average actively-managed fund in the U.S. charges 1.47% per annum compared to just 0.35% for the average ETF.
From a global perspective, however, U.S.-listed ETFs are plagued by one major fundamental disadvantage: all of these products are valued and denominated in a heavily indebted currency - the U.S. dollar.
The U.S. dollar remains in a secular bear market since 1971 when the Nixon administration effectively closed the gold standard. And since 1987, the dollar has plummeted more than 50% against the world's hardest currencies. More recently, the dollar has shed more than 7% since January against the euro and lost a cumulative 47% from 2002 to 2004.
ETFs in Europe are all valued in euro, a currency that should continue to appreciate against the dollar over the long-term.
ETFs in Europe have boomed over the last six years. The Deutsche Borse Group in Frankfurt has emerged as the largest hub for exchange-traded-funds denominated in euro. Assets of German-listed ETFs have leapt 64% year-over-year through December 31, 2005 to €26.9 billion or $31.9 billion dollars. As of March 31, 2006 (latest data available), German ETF assets have grown a further 20% to €32.3 billion or $39 billion dollars.
If an investor wants to play sectors, countries or even commodities, Frankfurt is by far the best and most liquid destination for exchange-traded products. A total of 117 ETFs now trade in Frankfurt - all denominated in euro.
As the U.S. dollar heads into the foreign currency basement once again versus most international units, indexing in non-dollar currencies continues to gain universal appeal among global investors.
But Frankfurt isn't the only bourse offering exchange-traded funds.
The third-largest hub after the United States and Germany is Euronext NV, a consortium of three European bourses, including Paris, Amsterdam and Brussels. Euronext now trades 105 ETFs in euro, mostly in Paris. And in London, the FTSE Index is home to 28 British sterling-denominated ETFs. In Canada, where the first ETF was launched in the early 1980s, a total of 19 products trade in Toronto.
ETFs are useful and cost-efficient vehicles, but should be used diligently in a broad-based asset allocation portfolio including bonds, alternative investments, commodities, real estate and foreign currencies. Also, most markets and sectors today are trading at either all-time highs or multi-year highs, offering poor values.
Coming up in the August issue of The Sovereign Individual, I'll recommend the best euro-denominated ETF offering the greatest value and the highest-yielding dividend among global major global indices.
ERIC ROSEMAN, Investment Director
on behalf of The Sovereign Society