To ETF or not to ETF?

MrLeek · 20 April 2017 at 2:25PM

Since I'm in danger of over analysing here I'd like some clarity - and maybe I'll get some clarity as a result of writing this post.

I've got a (hopefully) reasonably balanced portfolio using trackers ready to be used in anger. 80/20 equity, rebalancing over 15-18 years to 50/50. 30% of the equity is going to be covering global small-caps, EMs and global REITs, with the aim of having less exposure to these markets as I rebalance towards 50/50. (I'm still looking at alternatives to a tracker for EMs)

By the time I get to 50/50 it'll be just 1-2 bond funds and one developed market fund....and that's what I'm wrestling with currently. I have it down to two options:

Run a pair of OEIC funds: Vanguard Dvp World Ex-UK (45%) and a FTSE UK All-Share Index Fund (5%), or
iShares Core MSCI World ETF (50%)

This is where my over-analysis is going haywire.

A quick look at the UK Index Fund shows just how weighted it is to a handful of companies - and I can't determine if that 'overweight' is softened by using the ETF.
The ETF has share buying charges to contend with (which can be softened by buying every other month) but with a slightly higher TER figure this seems like a more expensive option overall - modelling using comparefundsplatform.com suggests that it's £1200 more over 20 years.
I also picked up on the currency issues, but I've read various things that either say don't worry about it....or that I should worry about it!
I did look at the World Tracker that Fidelity runs. But the top ten holdings included things that I didn't totally understand (rather annoyingly Morning Star won't show the holdings now!) - whilst I'm sure they're just fine, not understanding something triggers my alarm bells slightly.
I've also considered separate index funds for the US, Europe, UK, etc...but one of my aims is to make this reasonably simple to rebalance and manage. Separate funds felt like I was ending up with something that could be more of a headache to run.
I'm also staying away from things like small-cap EMs. Whilst some arguments say that having 5% in that is a good thing, that's probably too risky for my liking - hence more investment into the 'mainstream' developed market.

Worth adding that I've already got good pension plans in place courtesy of ex-military service and current civil service. It also feels like I've half answered my own question, but the overweight in the UK Index is pulling me back towards the ETF.

If there's other thoughts/questions I should be considering then please feel free to throw then at me - you'll be doing me a favour!

coyrls · 20 April 2017 at 3:04PM

MrLeek wrote: »

I've got a (hopefully) reasonably balanced portfolio using trackers ready to be used in anger. 80/20 equity, rebalancing over 15-18 years to 50/50.

If you want to take this approach, the Vanguard Target Retirement Fund 2035 will take you to 50/50 in 2035 with no management required from you, see: https://www.vanguard.co.uk/documents/adv/literature/trf-adviser-guide.pdf

Cogs44 · 20 April 2017 at 3:29PM

HSBC MSCI World (HMWO) is perhaps a cheaper ETF than iShares that may be worth a look if you haven't seen it already.

greatkingrat · 20 April 2017 at 4:08PM

Whichever way you go, a significant percentage of your UK holdings will end up in a few large companies like Shell / HSBC / BP etc. If you don't want that then a tracker fund isn't for you. It just looks more obvious when you buy a separate UK fund instead of it being included in a World fund.

Remember that if a company makes up 5% of a fund that is 5% of your total, that is only 0.25% overall invested in that company.

grey_gym_sock · 20 April 2017 at 4:11PM

what platform are you using for this? because there are quite a few platforms with percentage holding charges for funds, but not for ETFs - which would make it cheaper to use ETFs, at least if you're investing a relatively large amount. OTOH, for smaller amounts invested, it can be better to use funds, because then the percentage holding charge for funds can come to less than the fixed dealing charge every time you buy/sell/rebalance ETFs.

do you want funds/ETFs that are Inc (income, i.e. pay income out) or Acc (accumulation, i.e. automatically reinvest income)? most funds have a choice of Inc or Acc units; most ETFs don't. the ishare ETF you mention is Acc; the HSBC ETF which Cogs44 mentions is Inc.

Acc has the advantage that there can be no costs for reinvesting income. Inc has the advantage that you could use income to rebalance, i.e. top up whatever holdings are relatively down.

Inc funds (just about) always pay out income in pounds. Inc ETFs typically (if they are global ETFs) pay out income in US dollars, which your platform may charge (typically between 0.5% and 1.5%) to convert back to pounds.

i don't see any problem with the actual composition of any of the funds you're looking at. though strictly, if you put 50% in a developed world including UK tracker, that will give you more like 3.5% UK and 46.5% world ex-UK. so if you go 5% and 45%, you are slightly over-weighting the UK, relative to its market capitalization. but that's harmless enough.

MrLeek · 20 April 2017 at 6:50PM

Appreciate all the replies so far. Some thoughts:

coyrls wrote: »

If you want to take this approach, the Vanguard Target Retirement Fund 2035 will take you to 50/50 in 2035 with no management required from you, see: https://www.vanguard.co.uk/documents/adv/literature/trf-adviser-guide.pdf

I had heard about the Target Retirement Funds that Vangard did...but hadn't really looked at them in any depth. Certainly something to look at a little more, especially since the fees are quite low. Although I am wary that I could lose some control over how and when I move from equities -> bonds. I'm not sure if that's a major factor or not - I suppose if things went well and I hit a target to retire early then it would be simpler to adjust my plans (and less so if using this Target Retirement Fund approach)?

grey_gym_sock wrote: »

what platform are you using for this? because there are quite a few platforms with percentage holding charges for funds, but not for ETFs - which would make it cheaper to use ETFs, at least if you're investing a relatively large amount. OTOH, for smaller amounts invested, it can be better to use funds, because then the percentage holding charge for funds can come to less than the fixed dealing charge every time you buy/sell/rebalance ETFs.

This is partly what started me looking semi-seriously at using an ETF. I've looked at some of the global iShares ETFs before (starting with the Global Value) and decided that it plus a general all-world tracker resulted in some overlap. But I was struggling to find options for an all-world tracker fund so I payed more attention to the Core World ETF.

But plugging an ETF vice an OIEC into comparefunds threw out Hargreves Lansdown as one of the lowest in terms of cost. Given that I had been shying away from HL until now due to their high platform costs (I've spent more time using Charles Stanley Direct) it rather surprised me to see HL coming out so cheaply, especially since the overall plan that I've described has 50% of my money in a single ETF. At that point £11.95 per trade is a lot....but it's offset by the size of the actual investment going into the ETF. Not to mention that I could alternative investments (month 1 into the ETF only, month 2 into all the other funds) and rebalance during "month 1" cycle.

Right now I've got no fund platform. I'm new to this so I've been taking my time, reading a lot, asking some questions and understanding where I'm trying to get to.

Looking ahead to retirement I'd want to have 18-24 months of cash (possibly more) to handle any bumps, along with the bonds paying out income. So I would imagine that selling some of the ETF from time to time when prices are good could be the best approach(?)

grey_gym_sock wrote: »

Inc funds (just about) always pay out income in pounds. Inc ETFs typically (if they are global ETFs) pay out income in US dollars, which your platform may charge (typically between 0.5% and 1.5%) to convert back to pounds.

Very valid point - I need to look at some of the possible platforms to see who does charge for currency conversion. Nothing jumped out at me in the fees of HL and CSD as yet.

MrLeek · 22 April 2017 at 6:05PM

Possibly another silly question but.....

I've been reading the charges by various platforms and read something on Fidelity's site that got me thinking. If all of my investments were in ETFs then i'd pay 0.1% of each transaction on top of the annual fund and platform fees. 0.1% is a fair bit lower than £11.95 a transaction!

I can see when a flat-fee for ETF/share transactions is a good thing. But am I translating this correctly - if I took 5 ETF funds and paid £1000 a month into them (keeping the numbers simple here) then I'd pay £1 transactions fees and 0.35% per annum to Fidelity....capped at £45 a year.

Am I missing something very obvious?? I'm aware that fund fees are a factor, but are there other charges that I'm missing here?

Plus · 22 April 2017 at 6:36PM

Fidelity don't carry a very large range of ETFs. Unlike most brokers, who will sell you any ETF listed on the markets that they offer, Fidelity pick and choose ETFs. If they have what you want that's great, but it's a pain if they don't.

That said, why are you looking at HL in terms of costs? To hold an ETF at HL requires an £11.95 deal fee plus 0.45%pa for an ISA (capped at £45pa). To hold an ETF at iWeb is a £5 deal fee with no fee for holding it (but a £25 account opening fee). It doesn't take much for that to beat HL. Other providers come in at different points on the tradeoff space - no account opening fee but higher deal fees, or lower costs for monthly purchases.

masonic · 22 April 2017 at 6:38PM

MrLeek wrote: »

Possibly another silly question but.....

I've been reading the charges by various platforms and read something on Fidelity's site that got me thinking. If all of my investments were in ETFs then i'd pay 0.1% of each transaction on top of the annual fund and platform fees. 0.1% is a fair bit lower than £11.95 a transaction!

I can see when a flat-fee for ETF/share transactions is a good thing. But am I translating this correctly - if I took 5 ETF funds and paid £1000 a month into them (keeping the numbers simple here) then I'd pay £1 transactions fees and 0.35% per annum to Fidelity....capped at £45 a year.

Am I missing something very obvious?? I'm aware that fund fees are a factor, but are there other charges that I'm missing here?

You mean here? https://www.fidelity.co.uk/investor/funds/fund-charge.page

It appears there is a pooling of market orders by JP Morgan. Some other providers offer regular investing a low cost (Hargreaves Lansdown has a £1.50 flat fee for regular investing), although in this case it appears to apply to selling as well as buying. So I don't think you are missing something.

MrLeek · 22 April 2017 at 6:46PM

HL (which I had been generally avoiding until recently because of the 0.45% charges you mention) suddenly popped up as one of the cheapest platforms when I used Compare Fund Platforms. Fidelity doesn't appear in there at all once you say that you want to buy ETFs which is clearly an oversight for that website. It's going to be less than HL overall (0.35% versus 0.45%), therefore unless there's some ETF that HL does than Fidelity doesn't then I can cross HL off my list again.

(Once you start adding in the fund purchase fees then the costs for iWeb head upwards - assuming 30 fund purchases a year, which for 4 OIEC funds and monthly transactions equals bi-monthly transactions plus some spares for rebalancing? - and iWeb and HL end up about the same. Once you're "living off the land" so to speak then iWeb rocks and the fees are excellent.....but if I'm missing something obvious then do let me know)

grey_gym_sock · 22 April 2017 at 7:42PM

with a large number of purchases, halifax share dealing will be cheaper than iweb (and both services are provided by the same company), because halifax has a £2 regular dealing service, which you can use to buy any fund or ETF.

sales or non-regular purchases cost £12.50, but you probably won't need many of those.

annual fee of £12.50 for an ISA.

buying ETFs would be cheaper with fidelity's 0.1% (assuming each purchase is for less than £2000). (and buying funds is free with fidelity.) but set that against higher holding charges.

To ETF or not to ETF?

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