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Risks involved in investing in foreign ETFs |
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Written by Wilfred Ling
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Thursday, 01 December 2005 |
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I have been advocating investing in low cost passive fund because active managed funds returns tend to produce poor returns despite the similar level of risk.
In Singapore, there is limited number of choices for passive funds and most of them have problems such as high cost or poor liquidity.
I personally invests in Exchange Traded Funds (ETFs) listed in AMEX. These ETFs which I had invested are globally diversified. Despite the withholding tax of 30% on dividends by the USA government, their annual cost is still lower then Singapore's registered unit trusts.
Unfortunately investing in these foreign listed ETFs carry some risks that do not appear in locally registered unit trusts. There are a few parties involved in purchasing these foreign listed ETFs:
1. Fund Manager
2. Trustee
3. Stock Exchange
4. Brokerage house
The Fund Manager, Trustee and Stock Exchange are not regulated in Singapore. Brokerage house is regulated by MAS if it is a locally registered brokerage house. If one uses an oversea broker, it is also not regulated by MAS. Therefore in the event of a dispute, the investor is left on his own without legal protection from the Singapore courts.
For Unit Trusts there are similar parties involved:
1. Fund Manager
2. Trustee
3. Distributor
4. Financial Adviser
All four parties for Unit Trusts are regulated in Singapore and hence the investor has access to legal protection.
What kind of problems resulting in a dispute could occur? I could think of the following risks:
1. Fraud
2. Neglient
3. Business failure
So buyer beware.
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