DIY Investor Magazine
/
December 2015
52
SIMPLICITY
- ETFs are simple to trade. Just like regular
shares, ETFs can be bought and sold throughout the
trading day through a UK stock broker using a share
dealing account or within an ISA or SIPP wrapper.
DIVERSIFICATION
- ETFs are intrinsically diverse. For
example, instead of building your own portfolio of UK
equities, and paying costs and fees on each one, you
can purchase a single ETF that provides exposure
to the top 100 UK companies through the FTSE 100
Index.
Not only are the vehicles themselves diverse, but with a
product range spanning different market
sectors, regions, themes, commodity baskets or fixed
income strategies, and the whole risk spectrum from
government bonds to single country emerging markets,
ETF investors can easily create a well diversified core
portfolio.
Furthermore, with both income paying (distributing)
ETFs and growth (capitalising) ETFs available, they can
capture both growth and income.
ETFs can also be used tactically to take advantage of
short term trends.
The combination of core and satellite allocations means
that investors can build a portfolio to suit their specific
views and investment budget.
Small portfolios can be built with a handful of ETFs, and
larger portfolios with very specific exposures
can achieve even greater diversification.
Exchange Traded Funds, or ‘ETFs’ as they are known, are leading the charge in a new democratic world of investment
where investors are increasingly taking charge of their own portfolio.
Ben Thompson
, Director of Listed Products & Lyxor
ETF looks at the key features of ETFs and considers why they may be attractive to the DIY investor:
COST
- Unlike actively managed funds where you
are buying the skills of a ‘Manager’, with ETFs you
are simply buying a passive investment that tracks a
benchmark index.
As such, ETFs are significantly cheaper and Total
Expense Ratios (TERs) typically range between 0.15%
and 0.85% per year. This TER is the annual charge that
includes costs such as custody fees, marketing costs
and index licensing costs.
On top of this, investors will be charged a brokerage
fee in the same way as when buying shares.
Importantly though, the TER is not a true measure of the
Total Cost of Ownership (TCO).
Although all ETFs share the same aim – to track an
index as cost effectively and precisely as possible –
some do it much better than others.
CONSTRUCTING AN INVESTMENT PORTFOLIO
USING EXCHANGE TRADED FUNDS
