Global ETF

Wobblydeb

I am thinking about adding a global equity ETF to my portfolio. What are your thoughts on this?

Cheers

tradetime

Am not a great fan of very broad blanket ETFs personally, depends what you are trying to achieve. Be sure, if you are going that way to look very closely at the weightings in it. Many of these are heavily skewed, or at least up to now have been, towards the US. In which case you might as well have something like SPY. I prefer, industry or sector specific ETF's and regional or country specific.

SG_Guy

The high-level answer is to choose a broad-based ETF rather than sector specific ones unless you are a relatively experienced investor. The whole point about investing in an ETF (other than its advantages over unit trusts in terms of lower expense ratio and the ability to trade during stockmarket hours rather than taking days to buy or sell) is to track a broad market index.

Sector-specific ETFs have proliferated in recent years and are useful for gaining exposure to specific sectors such as commodities or clean energy. However, being sector specific, they are also less diversified and riskier. A lot of institutional investors trade in sector-specific ETFs i.e. making bets. Then there are also ETFs that bet on securities falling in price. Again, only for the more experienced investor.

A global ETF is a good addition to your portfolio. Just remember that as brokerage charges apply to ETFs, you are better off (in terms of lowering your investment costs) investing in ETFs in lump sums periodically; if you intend to drip feed your investments e.g. £500 a month, then, all other things being equal, you are better off with a unit trust than an ETF.

Reaper

Another thing to look out for is charges. It used to be that ETFs could be relied upon to be dirt cheap but that is no longer always true.

From last week's Sunday Times:

The Marshall Wace Global Alpha Index, which it hopes to launch before the end of March, will have a 1.75% fee that includes a 1.5% management charge as well as a 0.25% charge for the ETF itself. There is also a 20% charge on any profits. This means a 10% return could be watered down to 6.6%.

Wobblydeb

SG_Guy wrote: »

A global ETF is a good addition to your portfolio. Just remember that as brokerage charges apply to ETFs, you are better off (in terms of lowering your investment costs) investing in ETFs in lump sums periodically; if you intend to drip feed your investments e.g. £500 a month, then, all other things being equal, you are better off with a unit trust than an ETF.

Hmmmm are you sure about that? I have an S&S ISA with iii, and just been looking at a quote for an iShares Euro-growth ETF. Normal commission of £10 applied, nothing extra.

:think:

purch

nothing extra

The ETF itself, has charges, just like an OEIC/UT or IT.

jon3001

Wobblydeb wrote: »

Hmmmm are you sure about that? I have an S&S ISA with iii, and just been looking at a quote for an iShares Euro-growth ETF. Normal commission of £10 applied, nothing extra.

:think:

If the brokerage fee is £10 then that's £20 for both a buy and a sell. £20 represents 4% of a £500 investment. Although you can ammortise that cost over long holding periods it's at the upper end of what most people like to pay in such charges.

Any lower that £500 and you're almost certainly better finding a unit trust. The right discount broker will rebate any initial charges and since the fund manager is dealing securities in bulk they have better economies of scale with respect to brokerage fees.

Sceptic001

I see there are moves in the US towards no-cost ETF trading. What chance of it happening here? I'm not holding my breath...:(

Wobblydeb

jon3001 wrote: »

If the brokerage fee is £10 then that's £20 for both a buy and a sell. £20 represents 4% of a £500 investment. Although you can ammortise that cost over long holding periods it's at the upper end of what most people like to pay in such charges.

Any lower that £500 and you're almost certainly better finding a unit trust. The right discount broker will rebate any initial charges and since the fund manager is dealing securities in bulk they have better economies of scale with respect to brokerage fees.

Can you explain what you mean by this bit? If iii is my discount broker, then who is the fund manager and why would they get better economies of scale than the company running the ETF? Sorry for the questions I just find this harder to get my head around than straight forward share purchases.

So the brokerage fee is the commission to iii on purchase? If I use portfolio builder (which is currently free) how does that then compare with unit trusts? How do the total expense ratios compare?

I am still struggling to see how ETFs are more expensive if I use portfolio builder and pick ones with low TER.....

Wobblydeb

For example I am looking at:

ETF - iShares DJ Euro STOXX Growth with a TER of 0.4%

versus:

Blackrock Continental European Fund with a TER of 1.67% (I picked this as being the most similar, and iShares are part of Blackrock)

Would both still cost the £10 broker fee to sell?

jon3001

Wobblydeb wrote: »

jon3001 wrote: »

Any lower that £500 and you're almost certainly better finding a unit trust. <b>The right discount broker will rebate any initial charges and since the fund manager is dealing securities in bulk they have better economies of scale with respect to brokerage fees.</b>

Can you explain what you mean by this bit? If iii is my discount broker, then who is the fund manager and why would they get better economies of scale than the company running the ETF? Sorry for the questions I just find this harder to get my head around than straight forward share purchases.

The fund manager is the manager of the unit trust (or ETF). He could be trading millions of pounds worth of securities compared to your £500s worth. When you look at the AMCs it will much less than the 4% transaction costs you'd be facing.

Since ETFs are quoted on the stock market you'd have to pay the brokerage fees yourself. Unit Trusts are quoted by the investment house running the fund and they can absorb those transaction costs into their own fee structure.

Wobblydeb wrote: »

So the brokerage fee is the commission to iii on purchase?

Yes

Wobblydeb wrote: »

If I use portfolio builder (which is currently free) how does that then compare with unit trusts? How do the total expense ratios compare?

I am still struggling to see how ETFs are more expensive if I use portfolio builder and pick ones with low TER.....

Check that portfolio builder does support the ETFs you want. I know when I was looking at some ETCs (such as PHAG and FAIG) it didn't.

But basically you'd have to calculate your overall % costs taking into account brokerage fees (buy/sell), bid/offer spreads and AMCs and compare the ETFs and unit trusts. Usually for the unit trusts you'll only pay an AMC whereas for ETFs the other fees will apply.