Page 38 - DIY Investor Magazine | Issue 32

What active bets are you implicitly making by investing In European markets?
• European companies have the largest exposure to emerging economies amongst developed countries.
• The relative reduction in EM exposure is thus lower (-8%) than for the entire EAFE (-11%)
• By investing only in Europe (no Japan, Australia, Hong Kong and Singapore exposure) your sectorial exposure won’t vary significantly compared to having those countries included.
3. PICKING A BENCHMARK
ETFs tracking MSCI EAFE Index are the easiest option to invest in all developed markets ex-US; however, these are only available for Europeans investors that qualify as Professional Clients as it relates to MiFID Rules.
Once you qualify you can get access to those ETFs with your broker. Non-professional European Investors can invest in a couple of equivalent funds.
MSCI EAFE ETFs are not available in UCITS format because they are meant for investors that want to control their home country bias; you will find ex-US Funds in the US and ex-UK ETFs in the UK.
As a retail investor, you can invest in a couple of UCITS ETFs that cover the different Markets:
• ETFs tracking European Stocks – provide coverage to most of the developed ex-US Markets; benchmarks’ coverage is detailed below.
• ETFs tracking MSCI Pacific Index – Lyxor provides an ETF tracking the MSCI Pacific Index. However,
it is a synthetic ETF and quite expensive (0.45%). Other MSCI Pacific funds exclude Japan. The largest is iShares MSCI Pacific ex-Japan (0.2%) that covers Australia, Hong Kong, Singapore and New Zealand and can be combined with iShares MSCI Japan IMI ETF (0.15%) that also includes small caps.
WHAT TYPES OF COMPANIES DO EUROPEAN ETFS COVER?
European Equities - Benchmark Coverage
WHAT ARE KEY CONSIDERATIONS IN CHOOSING A BENCHMARK?
• A larger Free Float coverage provides you more exposure to smaller and medium companies and ultimately better diversification
• Most benchmarks include the UK except the EuroStoxx 50 that only includes Eurozone countries and is fairly concentrated in Large Caps
STEP 2 – FILTERING ETFS BY CHARACTERISTICS
Once you have selected a benchmark you can drill down into fund characteristics.
You can save considerable amounts of money by optimizing taxes and reducing various ETF risks.
WHAT CHARACTERISTICS SHOULD I CHECK?
Make sure you understand how to pick the right ETF; we have designed a guide that covers all the main aspects of Equity ETF Selection including understanding of (i) Currency and (ii) Distributing/Accumulating Share Classes or (iii) how to assess critical Fund Size.
WHAT ABOUT TAXES?
Here is the potentially tricky part; for a small portfolio, this may not make a big difference but if you have a sizeable allocation, tax leakage may be a problem.
DIY Investor Magazine · Feb 2022 38