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FIXED INCOME AND REGIONAL ETFS BOOMING

NIZAM HAMID<strong><br />HEAD OF SALES STRATEGY, ISHARES EUROPE</strong><br /><br />IN WHAT has been a tough environment for many investment products, exchange-traded products (ETPs), which include both exchange-traded funds (ETFs) and exchange-traded notes (ETNs), have gone from strength to strength in the past year, recording net inflows of &euro;41.2bn. During the financial crisis, investors have migrated away from over-the-counter (OTC) swaps, which involve a high level of counterparty risk. This has only increased the popularity of ETFs, which have a much lower level of risk.<br /><br />This desire to more closely manage the level of risk in portfolios has seen investors choose fixed income ETFs. This is in contrast to when equity markets were booming and people were relatively indifferent to portfolio risk and to their allocations towards fixed income assets.<br /><br />Over the last 18 months, UK and European investors have realised that having a diversified portfolio will pay off over the longer-term and have returned to the historical trend of giving a higher weighting to fixed income than they had previously done. As a result, assets in fixed income ETFs have jumped from &euro;3.5bn four years ago to &euro;32bn now. I actually think this could be a longer-term trend where risk-averse investors may remodel their portfolios to include fixed income ETFs which are cost efficient, transparent and liquid.<br /><br />Unlike last year, we have seen significant outflows from money market funds in 2009. While they were a safe-haven during the turmoil of 2008, they are no longer the product of choice as investors seek higher yields.<br /><br />Investors have tried to diversify their portfolios by moving into broader regional equity ETFs and this inflow accounts for 26.6 per cent of new asset flows. People are trying to diversify across regions as well as pinpointing individual ETFs that look promising such as China ETFs. This will continue as investors buy into China and Asia being the engine for growth.