DIY Investor Magazine
/
December 2015
44
Selecting the right ETF can be daunting for those new
to passive investing. With little consistency in terms of
naming convention and differences between physically
replicated and synthetic funds, as well as short and
leveraged products, some may find themselves
dissuaded from investing in what is an increasingly
popular asset class.
However, the adoption of a few key steps in the
selection process can make things considerably easier:
FIRST, FIND THE RIGHT INDEX
One of the most common mistakes people make when
choosing an ETF is simply looking at what it says on the
tin and figuring that’s good enough.
If a fund says it’s a ‘China’ ETF, it must give good
exposure to China, right? Not exactly. Two funds that
both claim to provide exposure to China … or Autos …
or Gilts … may sound similar, but if you dig underneath
the surface, you’ll find wildly different portfolios (and
therefore get wildly different returns).
Consider two of the most popular China ETFs listed in
the US: the iShares FTSE China 25 ETF (FXI) and the
PowerShares Golden Dragon China Portfolio (PGJ).
Both funds are well-established, with 10+ year track
records. FXI has more than $5 billion invested in it,
while PGJ has $250 million; in the past month alone,
FXI has outperformed PGJ by more than 5%. What
gives? The two funds have different takes on ‘China,’
that’s what. FXI owns mostly large, government-owned
financial and energy companies, with established
business lines and defensible profits.
It is 52% invested in banks and has a weighted
average market cap of $114 billion. In other words, it’s a
defensive portfolio.
PGJ, in contrast, only holds stocks in companies
listed on the New York Stock Exchange that do the
majority of their business in China. It is 43% invested in
Technology, with just a 5% weight to banks. Its average
market cap is $34 billion. It’s designed for the more
aggressive China investor.
Is it any wonder these two ‘China’ ETFs performed
so differently? The choice of index and the portfolio it
providers trumps all other choices, so look here first.
COST
Even if there are several ETFs tracking the same index,
there can be large divergences between vehicles when
it comes to costs.
For example, UK equities are a likely asset class choice
for any investor putting together an investment portfolio.
According to data from Morningstar there are twenty
four ETFs that track large cap UK equities, fifteen of
which track the main UK equity index, the FTSE 100.
When taking a first look, the costs vary considerably.
The annual net expense ratios range from 0.10% for the
PASSIVE INVESTMENTS
ACTIVE SELECTION
Matt Hougan
President – ETF.com
Rebecca Hampson
European Editor – ETF.com
With over 1,300 Exchange Traded Funds (ETFs) listed on European stock exchanges, and countless more listed
overseas with a wide variety in terms of how funds are invested and structured.
Matt Hougan
and
Rebecca
Hampson
of ETF.com consider how to find the right fund to suit your needs?
