Fearless US ETFs lead the charge

With US exchange-traded funds pulling in nearly US$800 billion (HK$6.21 trillion) this year, market watchers say Hong Kong's retail investors should take a closer look at investing in these funds instead of individual stocks to spread their risk, while also buying the dip amid volatile markets.

Last month, the S&P 500 Index suffered its worst two-day selloff since October 2020 triggered by the fears over the new Omicron variant, with investors flocking to snap up US shares and ETFs amid the wobble.

But investors are also advised to temper their purchases and not pour cash into the market as there could be another market sell-off, warns Francis Kwok Sze-chi, vice chairman of the Hong Kong Institute of Financial Analysts and Professional Commentators.

He says ETFs are a good option for investors looking at medium to long-term gains in US equities, as they provide diversification benefits in times of volatility.

ETFs are baskets of securities that can be traded easily as individual stocks. They are generally considered less risky as they build a more diversified portfolio, carry lower fees and most of them are passively managed.

BUYING THE DIP

Retail traders snapped up roughly US$443 million in SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust Series 1 (QQQ) among other large cap ETFs on November 26 when the Dow Jones Industrial Average tumbled 905 points and the S&P 500 Index fell 2.27 percent, Bloomberg reported.

For the month of November, US ETFs attracted an estimated US$73.1 billion of new money despite the tumultuous end of the month, bringing their year-to-date inflows to US$793.6 billion, data from MorningStar shows.

Among them, ETFs that track US large-cap firms collected a total of US$179.8 billion this year as of November, jumping 78 percent year on year, according to MorningStar .

The three largest ETF providers globally in terms of assets under management are BlackRock, Vanguard and State Street Global Advisors, accounting for over 80 percent of ETF assets, according to data from Statista.

All their ETFs track the S&P 500 Index and are listed on the New York Stock Exchange Arca and they offer a good starting point for beginners to invest in US stocks, says Kwok.

SPY, launched in 1993 by State Street, is regarded as the first listed ETF in the US. It has amassed assets of US$426.9 billion as of December 9, with a 0.09 percent expense ratio while its year-to-date returns as of December 10 was 27.04 percent.

Vanguard's S&P 500 Index ETF (VOO), launched in 2010, has led the largest year-to-date asset inflow as of November, gathering US$44.96 billion in capital, according to MorningStar. The ETF charges investors 0.03 percent annually and it has assets of around US$277 billion, with a year-to-date return of 27.12 percent.

iShares Core S&P 500 ETF (IVV), issued by BlackRock in 2000, has assets of US$331 billion. It also charges 0.03 percent annually and has yielded returns of 27.12 percent this year.

All three ETFs have exposure to more than 500 large-cap firms in the S&P 500 Index and pay dividends quarterly.

SPY costs a little more than VOO and IVV, but is more liquid as its daily trading volume averages 780 million shares while IVV and VOO trade about 5 million and 4.5 million daily on average respectively.

Another ETF by Vanguard, Vanguard Total Stock Market ETF (VTI), has also been favored by investors this year, ranking second in year-to-date inflows as of November, according to MorningStar.

VOO and VTI have roughly a 80 percent overlap but VTI, launched in 2001, is more comprehensive as it includes 20 percent of mid- and small-cap US stocks in its portfolio. Charging 0.03 percent annually, it is relatively more volatile than VOO and its year-to-date return stands at 24.23 percent, slightly lower than VOO's, but its long-term performance is similar to VOO's, which has returned around 16 percent annually over the last decade.

Large financial institutions have also tilted in favor of ETFs this year, even converting mutual funds into ETFs - in August, JPMorgan Asset Management announced it will convert four mutual funds with US$10 billion of assets into active ETFs in 2022.

ACTIVE OR PASSIVE?

Active ETFs, which are run by managers or investment teams, have boomed in popularity this year mainly driven by the success of Cathie Wood's Ark Invest products over the past year, but they have a higher expense ratio and are generally more volatile than passively managed ETFs.

Passive ETFs, however, are not without risks. For example, ETFs that track indexes can sometimes underperform their benchmarks, which is known as a tracking error.

ETFs have witnessed record growth this year, with assets surpassing US$10 trillion globally in November, just six months after it hitting US$9 trillion in May, according to EPFR.

North American ETFs still have the largest footprint, accounting for 65 percent of the total assets for all ETFs, the data shows.

As ETFs can be traded easily as stocks, investors can trade US-listed ETFs in Hong Kong in the same way they trade US stocks locally, either through a bank or a brokerage.

For example, investors can open an investment services account at the Hong Kong and Shanghai Banking Corporation, whose commissions on trading US stocks start at US$18 per transaction for the first 1,000 shares and increase depending on the volume of shares traded. They can also open an account with local or international brokerages including online brokers like SoFi Hong Kong, Interactive Brokers and Futu Securities.

Commissions and other service charges vary among banks and brokers.

Interactive Brokers charges either tiered or fixed commissions. The fixed pricing requires commissions of US$0.005 per share with a minimum of US$1 per trade and a maximum charge of 1 percent of the trade value of the transaction. But, it also does not charge commissions for certain ETFs.

Some platforms, ranging from traditional players like Charles Schwab to newcomer Webull, offer commission-free online trading. But Charles Schwab needs a minimum US$25,000 deposit to open an international account and commission-free model, which is enabled by a practice in which brokers receive payments from dealers for routing trades to them, and has drawn more criticism amid the rise of Robinhood, which popularized the zero-commission trend among brokers.