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The combination of instalment warrants and exchange traded fund (EFTs) represents a contemporary shift in allowing investors the opportunity to leverage their exposure to some of the world’s largest and emerging markets. Mark Flynn, Vice-President of Equity Derivaties and Structured Products at JP Morgan explains how investors can get on board.

The new instalment product called DARWINs, is issued in Australia by JPMorgan and may suit those investors who are keen to build an investment portfolio with access to world markets via direct leveraged exposure to various international indices.

JPMorgan DARWINS are now issued over a range of ETFs, branded iShares, from Barclays Global Investors.

What are ETFS?

Exchange Trade Funds (ETFs) such as iShares, provide an efficient, cost-effective and liquid investment vehicle, delivering similar returns to the index without being dependant on the performace of an asset manager.

ETFS have experienced phenomenal growth since the first vehicle regarded as an ETF was launched in the United States in 1993. Four years later, total assests under management were almost $US8.2 billion. By the end of December 2007, this diversified low-cost investment vehicle had taken off, attracting $796 billion under management.

iShares are the world’s leading family of ETFs. Over 300 iShares ETFs are currently traded on major stock exchanges around the world. iShares account for more thatn 50% of the ETF market worldwide with over US$400 billion under management as at December 2007.

In Australia, there are currently 14 choices of iShares ETFs listed on the ASX providing a flexible and cost-effective way for Australian investors to gain immediate and precise access to international markets including China, Taiwan and South Korea.

By purchasing iShares, Australian investors can gain exposure to an index in one simple transaction on the ASX. For example, the iShares S&P 500 Fund (ASX code:IVV) is an ETF that tracks the performance of the S&P 500 Index.

iShares are transparent, reflecting the performance of an index. Compared with actively managed equity funds, ETFs usually disclose holidings more regularly so investors are aware of exactly what they have in their portfolio. To learn more about iShares as well as fund holdings details are available at the iShares website.

Additionally they can provide diversification in a more risk-controlled manner. Instead of the higher risk strategy of investing in a few chosen companies, iShares investors can gain a broader exposure to entire markets in an index. Investors can select to invest by assets class, market capitalisation, sector or country gaining accessibility, flexibilty and versatility. iShares can be bought and sold just like through a broker, investment advisor or internet trading accounts. Their flexibilty makes them attractive to both institutional and individual investors for a wide range of investment strategies suited to their financial needs and investment objectives, such as ‘core-satellite investing’, ‘buy and hold’ investing and tactical asset allocation.

‘Core-satellie investing’ involves holiding a core of lower risk investments while looking for higher returns at the margin. ‘Buy and hold’ is all about a long term investment time-frame, whilst tactical asset allocaction allows investors the opportunity to shift between economies and regions in response to economies events or when market changes are expected.

As well as these strategic strengths, there are potenial cost savings to be made with this style of investment compared with actively managed funds and individual share holidings. For the cost of a single iShares transaction, an investor can buy a fully diversified index. To achieve this same level of diversification through individual shares, investors would be up for a high of trading costs for each transaction.

Investing in iShares does expect the holder to foreign currency movements. The value will fluctuate depending on the movement in shares as well as changes in foreign exchange rates.

Why Pair ETFs with instalment warrants?

Put simply, they can provide leverage benefits. Appropriately geared, returns may be amplified for the equivalent capital invested: a 1% per cent rise in the index, may result in a 2 or 3% rise in the value of the ETF instalment (depending on the instalment’s level of gearing).

There are many potenial benefits to this type of strategy. Both ETFs instalments are eligible investments for self-managed super funds, risk is limited to the capital invested and there are no credit checks or margin calls.

As with any investment, there are downsides. Instalment warrants are only suitable for investors who understand warrants and are comfortable with the risks, including:

  • any decrease in the value of the underlying securities will decrease the value of your investment;
  • any losses in the underlying securites will have a greater impact on the value of your investment compared with the underlying securities, because the investment is a leveraged financial product;
  • the potential for total loss of the first instalment;

These risks need to be weighed up carefully, and discussed with your financial advisor who will no doubt conduct a full and comprehensive review of the Product Disclosure Statement (PDS). Your advisor should also weigh up the benefits, including the potential for investors to leverage exposure to shares in international indices with limited recourse financing; while gaining the economic benefits of share ownership for the part of the upfront cost of acquiring the underlying securities.

Investors not only recieve the benefit of all dividends and franking credits (if eligible), but also the bonus of capital appreciation in respect of the underlying index.

Plus, once a year on the reset date it is possible to make the final instalment payment and take delivery of the underlying ETF.

For those wanting to leverage exisiting positions instalment warrants can give investors the opportunity to free up capital for the investments by making a shareholder application without triggering a capital gains events.

Are they for me?

So who do these products suit? Instalment warrants my suit those investors who believe the underlying ETF is the right investment for their portfolio.

Instalment warrants over iShares ETFs are designed for those seeking leverage exposure to international markets with the protection of limited recourse finance. They can also be a good match for those keen to diversify their portfolio, for those who understand and are unperturbed about the risks and those seeking a long-term investment offering annual reset dates and ASX liquidity.

JPMorgan instalment can be acquired on the ASX through stockbrokers or by lodging an application via your financial advisor with JPMorgan Investments Australia Limited.

For more information visit the JPMorgan website

DARWINS are issued by JPMorgan Investment Australia Limited (ABN 21 056 751 716) (AFSL 298633) (“JPMIAL”). The Product Disclosure Statement (PDS) dated 17 December 2007 relating to DARWINS is avaible from www.jpmorgansp.com.au. The information provided does not take into account your financial circumstances, needs or objectives. Before investing in DARWINS you should carefully consider whether this product is appropriate for you by reading the Product Disclosure Statement for DARWINS and consulting your financial advisor or stockbroker. You should seek your own taxation advice before making any investment in DARWINS(c) 2007 JPMorgan Chase & Co. JPMorgan is the marketing name for the equity derivaties businesses of JPMorgan Chase & Co. and its subsidiaries and affilliates worldwide.

iShares is a registered mark of Barclays Global Investment, N.A JPMorgan’s DARWINS (‘DARWINS’) product is not sponsored, endorsed, sold, or promoted by BGI or Barclays Global Investors Australia Limited (‘BGIA’). BGI and BGIA make no representations or warranties to the owners of DARWINS or any member of the public regarding the advisability of investing in DARWINS. BGI and BGIA have no obligation or liablity in connection with the operation, marketing, trading or sale of DARWINS.

The views, opinions or recommendations of the author in this article are soley those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. the content is for educational purposes only and does not constitue financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all Liablity for any loss or damage arising in any way including by way of negligence.

(c) Copyright 2008 ASX Limited ABN 98 008 624 691. All rights reserved 2008.

This article is not a substitute for independent professional advice. We do not warrant the accuracy, completeness or adequacy of the information or material in this article. All information is subject to change without notice. We and each party providing material displayed in this article disclaim liability to all persons or organisations in relation to any action(s) taken on the basis of currency or accuracy of the information or material, or any loss or damage suffered in connection with that information or material. You should make your own enquiries before entering into any transaction on the basis of the information or material in this article. Please ensure you contact us to discuss your particular circumstances and how the information provided applies to your situation.


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