DIY Investor Magazine
/
March 2017
38
Annamarie Cumiskey
London Passive Investing Club
ETFS: HAYSTACKS, HAYSTACKS AND MORE HAYSTACKS
John Bogel, the CEO of Vanguard, a major Index
Tracker provider in the US likes to say: ‘Don’t look for
the needle in the haystack. Buy the Haystack.’ After five
years of rapid growth in new Exchange Traded Fund
(ETF) offerings in the UK, ETF investing feels more like
looking for a haystack amongst thousands of haystacks.
Ten years ago, the choice of Index Trackers available
to DIY investors was limited to the world’s main indices
such as the FTSE 100 and S&P 500. Today, thousands
of equity, commodity and sector ETFs are available via
online brokers and they behave in similar ways to index
trackers.
The rising popularity of ETFs shows in the amount
invested. In 2016, ETF assets accounted for €365
billion world-wide, a rise from €319 billion in 2015, and
signals a major shift in recent years by institutional
investors from actively managed funds to ETFs, also
known as ‘passive’ funds. For DIY investors access to
the world’s markets has never been so easy, transparent
and diversified as ever before. ETFs are inexpensive
to set-up and manage so attractive to fund managers.
Algorithms are used to proportion equities, bonds or
commodities into a fund. Algorithms also manage any
changes to these proportions as the fund tracks market
movements. Effectively, the process of stock picking has
been automated.
No expensive fund managers are used to select stocks,
so the fund provider can set very low management fees.
Vanguard, iShares and DB-X-Trackers offer an S&P 500
ETF for a 0.07% management fee as opposed to an
actively managed fund that typically charges 0.75%.
The iShares Physical Gold ETC, an Exchange Traded
Commodity, is a ‘physical replication’ exchange-
traded fund for a commodity meaning that the fund
actually owns the gold, that happens to be stored in
a J.P.Morgan vault in London – a small portion of the
management fee pays for the storage.
ETFs differ from Index Trackers in that they can be
traded in real-time on the stock market. This has led
Bogel to criticise them because he believes over-trading
diminishes returns in the long run. Like Index Trackers,
ETFs that track equity indices such as the MSCI come
with dividends.
There are two main types of ETFs: ‘sophisticated’ and
non-sophisticated’. The former means that the fund is
a financial product designed for professional traders,
or in other words, if you don’t know what you are doing
‘buyer beware’. An ETF’s status as sophisticated or
non-sophisticated must be mentioned in the Factsheet.
Though often words appear in the title that indicate
the ETF is sophisticated: words such as ‘short’, ‘long’,
‘leveraged’ and ‘hedged’.
The latter type of ETFs, non-sophisticated, have more
in common with Index Trackers. They simply track the
market movement of indices, commodities and sectors.
The best performing national indices this year-to-date
are those in Korea (11%), China (10.6%) and Australia
(8.2%). Information Technology (9.9%), Healthcare
(8.1%) and Materials (6.9%) represent the best three
performing sectors world-wide, according to figures
released by MSCI.
All of these best performers can be accessed via
ETFs. Keeping a portfolio entirely made up of ETFs or
‘haystacks’, is known as Passive Investing.
Annamarie Cumiskey is a former award-winning national newspaper and TV journalist
specialised in European Affairs, who is now dedicated to DIY Investing and runs the
London Passive Investing Club, a meetup group for people interested in ETFs and passive
investing.
