Merger mania has gripped national stock exchanges. These mergers should help to cut dealing costs, particularly those involved in post-trade clearing and settlement. In Europe the fragmentation of clearing systems has helped prevent trading fees from falling to American levels.
Yet while national stock exchanges are following the Dodo into extinction, buyers of tracker funds remain attached to their equivalents in the index world: country benchmarks. According to iShares, funds following country indices account for the largest single category of European exchange-traded funds (ETFs). Five of the top ten European ETFs by size track single country benchmarks: the S&P 500, DAX (two funds), CAC 40 and FTSE 100.
Whatever happens on the exchange front, these ‘national’ indices won’t go away and ETFs will still track them. But the truth is, it makes little sense for investors to keep buying them. For a start, your country’s stockmarket index may have little to do with the domestic economy. For example, the companies in the FTSE 100 derive 70% of their revenues from overseas activities. FTSE’s nationality rules allow companies domiciled in another country, but whose main share-listing is in London, to join the index. So an Indian utility or Kazakh miner can end up in a ‘British’ index purely because it sells its shares on the London Stock Exchange.
Second, focusing on a single country benchmark can leave you very heavily invested in particular areas of the market. During the 1999/2000 technology bubble, half the S&P 500’s value was devoted to that sector. When the bust came, those who had bought the index suffered particularly badly as a result. Other national benchmarks may have heavy sector concentrations simply by virtue of the economic activity in the country concerned: the UK and banks, or Germany and car-makers, for example. It’s probably better to choose sectors directly from among the specialist ETFs that offer access to particular industry groups. At least that way you can track your exposure to specific areas more accurately.
-
Paul Amery edits
www.indexuniverse.eu