Exchange Traded Funds, an alternative way to invest.

tradetime

I thought I'd start a thread to touch on the subject of Exchange Traded Funds, commonly known as ETF's, a market product which seems sadly overlooked in the UK. My own personal familiarity is with US listed ETF's where the widest variety and most liquid issues are to be found, so most of the stuff I will post on the subject will relate to them, I hope anyone who has familiarity with UK listed ETF's will add some content to make up for my shortfall there.
Until recently the best way to achieve a diversified portfolio without a vast amount of money to invest was to buy into a Unit Trust or an OEIC, and indeed for many that may still be the case. However over the last couple of years a new product has emerged which may offer an alternative for the slightly more adventurous, the ETF.

An ETF is a packaged collection of securities which generally, though not always, reflects a broad market index, sector index, geographical or regional index, bond index, commodity index, individual commodities, and currencies.(doubtless I've missed something, but we'll pick it up later) An ETF trades just like an ordinary stock on an exchange throughout the day, it can be bought, sold, and even sold short at any time during exchange hours generally with no more restrictions than apply to a normal stock.

A handful of ETF's can give an individual investor exposure to 100's of stocks, all over the world, or the entire range of commodities, you can overweight or underweight sectors simply by increasing or decreasing the amount of shares held in various sector ETF's thus emulating a sector rotation strategy whilst remaining diversified.

One of the first, and still most popular ETF issuers are Barclays iShares, their Dublin registered London listed ETF's provide a glimpse into what is possible, whilst their US listed iShares give a much broader range. Another more recent introduction on the LSE, is the ETFSecurities family which adds amongst other things, commodity exposure.

sabretoothtigger

How much money does Barclays make from operating ishares do you think, they take commission on sales or management fees?

D1zzy

I've gone for iShares 250. Didn't realise initially that they were Dublin registered - so now wondering what the tax position is - UK tax? Irish Tax ? Both?

*Denise*_2

HI Tradetime, what a timely thread! I've been thinking about ISAs since I woke up at 06:00! I'm planning to invest in ETFs (preferably on a regular basis) and my initial research suggests selftrade might be a good place to do that. Apart from the fact that I already have an account there(!) they don't charge an annual management fee to hold ETFs and shares (c.f. Hargreaves Lansdown who charge 0.5%+vat). The main drawback seems to be that on the regular payment basis there is a limited number of ETFs available.

timarr

If you're investing in ETF's just be careful what the underlying investments are. Few examples.

Some of the commodity ETF's last year ran into problems because it turned out they were underpinned by derivative contracts with AIG, the big US insurer that ran into huge financial problems and had to be bailed out by the US government. Having ETF's underpinned by complex derivatives may not be a bad thing but it probably exposes you to a different kind of risk than you were expecting.

Most share based ETF's will track some index or other and the label "index tracker" tends to make people feel that these are inherently safe (or at least as safe as possible in the risk ridden world of stocks). As ever, though, the investment industry can't leave a good thing alone so now it's inventing new indices to track against. This can be useful if you know what you're doing in order to get specific sector exposure, but you still need to be careful.

Understanding how the underlying indices are managed is important. Take the Corporate Bond ETF from iShares (SLXX). This, even now, is heavily based on the corporate bonds issued by banks and other financials. So what might seem to be a simple play on corporate bonds recovering before the stockmarket does (historically they do) is actually a bit of a gamble on government intervention. The underlying index here is adjusted quarterly so the next update is due next week.

Sticking to straightforward broad based index tracking ETF's like the iShares 250 is fine, but some of the other stuff is an accident waiting to happen.

timarr

tradetime

sabretoothtigger wrote: »

How much money does Barclays make from operating ishares do you think, they take commission on sales or management fees?

I have no idea tbh, but I do know they are currently in talks to sell the iShares operation, and figures I have heard bandied about have included $5bn so it's clearly a good business.

tradetime

D1zzy wrote: »

I've gone for iShares 250. Didn't realise initially that they were Dublin registered - so now wondering what the tax position is - UK tax? Irish Tax ? Both?

The fund is registered in Dublin, however for tax purposes you are registered in the UK (I'm assuming) so you are liable for UK tax. Barclays is possibly liable for Irish tax on that part of its operation.

tradetime

*Denise* wrote: »

HI Tradetime, what a timely thread! I've been thinking about ISAs since I woke up at 06:00! I'm planning to invest in ETFs (preferably on a regular basis) and my initial research suggests selftrade might be a good place to do that. Apart from the fact that I already have an account there(!) they don't charge an annual management fee to hold ETFs and shares (c.f. Hargreaves Lansdown who charge 0.5%+vat). The main drawback seems to be that on the regular payment basis there is a limited number of ETFs available.

Hi *Denise* can't say I could make any suggestions as regards which broker you use, as with regards to UK brokers I am a complete novice having only bothered with them because they are the only ones who do ISA's. Frankly from what I have experienced with my first one opened about 2 months ago, I have little but contempt, I am now in the process of transferring to another.

In my opening post I suggested they maybe an alternative to the more usual Unit tusts or OEIC's, although I did say those type of investment may still be the best for many people. To me as an ETF trader, the cost of commission to buy and sell is the same as regular stocks, and that cost is recurrent every time you buy and sell, as such they may not be ideal for people who want to "save" or drip feed into an ETF, unless of course the ISA providers offer some sort of reduced cost option, I do know Interactive Investor for instance offers a £1.50 planned purchase (I think) which allows you to buy at regular pre-set intervals, now I'm not sure how that would work out cost effectively, as it's not how I operate. So you would need to look closely at what offers the best value in that instance between ETF's and the more conventional funds offered by a fund supermarket. I know there are lots of guys / girls on here who are familiar with that and could offer some input.

ozzage

I'm not very experienced but I've thrown my hat firmly into the ETF ring and built a portfolio around them.

The selection here is not particularly massive but most of what I've wanted to do I've been able to achieve.

I currently have a selection of nine iShares and db x-tracker ETFs making up my portfolio..

I'm still in the building stage getting all my percentages right based on my sector/size allocations but I'm nearly there. Going forward I have a plan to invest regularly into them, operating on a three-monthly cycle to keep the transaction costs down (ie I won't invest every month into all nine, but rather each one will get added to every three months)

The main problem I'm facing is that for the "play" part of the portfolio (ie where I can buy random things based on what I think is good at the time :P) , I can't always do what I want because of lack of availability of ETFs or because my broker (Interactive Investor) doesn't let me trade them. For example I was considering buying a shipping ETF (SHPP) but I can't trade it, which is frustrating.

As I said, I'm investing through III and using their £1.50 per trade share builder system. This has worked well for me so far. I'm not trying to "trade", just invest, so a few days either way isn't a problem for me.

tradetime

As I stated earlier I primarily operate, with regards to equities, in the US markets, although I am British and live here in the UK. This was largely a result of the fact that when I first took an interest in stock markets just over 10 years ago I was living abroad, that gave me access to US brokerage firms. Naturally as a Brit I first looked at UK brokerages, with a view to investing in UK listed companies, familiarity breeds content.

In the end it came down to the costs, and technology, the UK was and still is light years behind in both respects. I suspect this stems from the fact that we simply aren't as aware of investment as those across the pond, and it is why ETF's are still in the embryonic stage here, whereas they are at toddler level in the US, over the last few months approximately 7 out of 10 of the highest volume stocks trading on the NYSE are ETF's. So my agenda here if anyone is wondering is to try and raise awareness and demand for products such as these, as the low interest rate envoironment seems to be fueling an interest in investment now in the UK. However people still need to carefully consider whether they are the right product for them.

Unfortunately the biggest hurdle in the UK would appear to be the lack of diversity. When I opened a trading ISA recently and was told by my first ISA provider that I could not use US ETF's in it I found myself on a crash course in learning the UK ETF market, and I have to say comapred to what I was used to I was shocked at how little choice there was, if you compare the two iShares sites in my first post, US offerings vs UK offerings you can't help but notice that we are seriously short changed on diversity. Also there is a void of information out there for UK investors in this area. So if anyone has anything on LSE listed ETF's please post it, I will post what I have found so far, and then post the US stuff I have for comparison.

tradetime

For example I was considering buying a shipping ETF (SHPP) but I can't trade it, which is frustrating.

Hi ozzage, did they give you a reason why you can't trade it? I recently ran into the problem with TD Waterhouse where they told me I couldn't trade any US ETF's, but have been in dialogue with iii and they have asked me to submit list of the ETF's I am interested in, and they will seek to make them available, and let me know which ones I cannot trade. Of four quick examples I gave at the time they said they have added 3 to their trading list, and one cannot be traded.