Welcome to the UK's first independent blog on ETF investing
What is an ETF?
An ETF hold stocks, bonds or commodities such that it aims to track an underlying index. ETFs are labelled as passive investing but I prefer to call them rule based (or algorithmic for those of you with maths A level). Non-index tracking funds are judgement based (or ego based in their worst extremes) as they represent what a fund manager likes to invest on a given day. Due to an absence of commissions paid to financial advisers, ETFs aren’t always recommended as an investment choice. However, ETFs attract significant inflows of funds as the silent revolution grows in strength. An ETF is different from other index trackers (unit trusts / mutual funds) in that for an ETF you trade in real time, not at end of day prices (but you pay a trading commission to do so) and there may be lower platform charges when such a SIPP or ISA wrapper. If you are investing over £2,000 in a trade then the guaranteed price offered by an ETF should make it a wiser investment vehicle. Why invest in ETFs instead of an Index Fund?
For me the real interest in ETFs comes from:-
1) the range of ETFs available The ETF market is continually evolving and innovating. New products are being created purely to capture the best returns of global investing. Examples include automation and robotics for innovation and growth and infrastructure for reliable cash flows. The range of ETFs is wider than that of other index trackers.
When selecting an ETF look for:- - the size of the fund. The larger the fund the more liquid it is meaning you can buy and sell very easily. Funds below £100m should be avoided. - the diversification of the fund. The largest holding should be no more than 10% of the total fund. This will help to limit price volatility. - the performance of the fund in good times and bad times. Technology funds have done well recently but they perform badly during market corrections. - the Morningstar rating. This is a star rating from 1 to 5 which looks at how the ETF has performed relative to its index (called the tracking error). The more stars the lower the tracking error. - the currency of the ETF. Most are US Dollar denominated, some are hedged and denominated in £. If the £ rises in value than the performance of US Dollar funds will lag those held in £. - whether the ETF distributes dividends or whether they are accumulated within the fund. Outside of the UK dividends are often quite small so this shouldn’t matter much for worldwide funds. - whether the ETF is physical or synthetic. A physical fund holds the underlying shares in the companies concerned. A synthetic fund does not and so there is a very small risk that the trading arrangement around this type of fund ceases. - the ongoing charge. The US is the cheapest market to trade so US ETFs will have the lowest charges. Higher charges could mean poor value for money but it could mean more exposure to more expensive emerging markets or more frequent trading to better replicate index tracking. Only reject a more expensive fund for a cheaper one if they are tracking the same index. Understanding ETF Jargon
What is this? iShares Edge – the company running the ETF, in this case the largest ETF provider in the world MSCI – the name of the company providing the stock market data that the ETF relies on World Momentum Factor – this describes the ETF. In this instance it invests globally and shares are bought / sold according to their share price growth or momentum UCITS – this means that the product passes the European Union regulatory framework on ETFs USD – the underlying currency of the investments as this is a worldwide fund this is to be expected (Acc) – the ETF accumulates any dividends and reinvests in itself rather than distributing dividends (GBP) – this ETF is reported in £ IWFM – this is the stock market code / ticker for the product