We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.

Noobie question: Understanding returns from ETFs

So, being a bit of a late starter when it comes to saving, I've been doing my reading and research and agree with the view of investing in 'sensible', low cost and passive funds to help grow my worth over a longer time frame.

However, one thing that books like Tim Hale's "Smarter Investing" doesn't quite cover is quite how I make my returns from various passive funds and I'm hoping that someone here can help me, given that I've been struggling with this for a little while.

Example:
Here's my issue. Let's say that I want to invest in a low cost tracker fund which tracks the US market. When doing this, I'm making two assumptions:
  • Firstly, this fund isn't going to be paying out dividends (because Barclays Stockbrokers lists any previous dividend payments for my chosen fund as 'NA')
  • Therefore, the only way I'm going to make a positive return on my investment is by selling the ETF at a higher price than that which I bought it for.
The problem:
Now over the course of the last 52 weeks, the US stock market has made a slow steady climb and is now worth about 14% more than it was this time last year.

Therefore, if I'd invested 52 weeks ago, I'd expect to have made around 14% on any investment I'd made too (give or take a bit and subtracting any necessary fees!)

However, the price of my ETF in my brokers account doesn't seem to have mirrored that climb at all. It's peaked and troughed over that same time period and generally not made the same 14% increase in value.

Is this normal? Surely I should be expecting the value of my ETF to be charting in a similar way to the US market shouldn't I (i.e. a nice steady upward climb)?

The Question:

I guess the point I'm trying to get to is, if I'd made that investement 52 weeks ago (and had now decided to sell), how could I ensure that I got my 14% return rather than the price of the ETF which is showing up in my brokers account?

I'm sure I'm just being silly and missing something stupidly obvious here, but it's a question I haven't been able to answer yet having searched in a number of places online and it's rather frustrating me.

Can anyone point out where I'm going wrong please? I'd be massively grateful.

Thank you in advance.

Comments

  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Post of the Month
    Remember to overlay currency rate effects.

    Say the U.S. index rises from 15540 to 16800 because the companies in it are worth about 8% more dollars than they were a year ago.

    As an American you have a pretty good return. However as a Brit it's not so rosy. $16,800 is worth £10,000 today, just like $15400 was worth £10000 a year ago. In pounds, you didn't made any money.

    So, 14% in USD is not 14% in GBP.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
    Part of the Furniture 10,000 Posts Combo Breaker
    There are both accumulation and income forms of many funds. With the former, dividends accumulate within the fund, but with the later they are paid out as cash usually into the same account as holds the fund. There seem to be very few accumulation (also called Total Return) ETFs.

    As for why your ETF hasn't tracked the US market, which ETF are you looking at and which US market?

    As for Americans making a good dollar return, yes they do now hold more dollars, but the buying power of those dollars is less than it was. Swings and roundabouts.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • Really appreciate your responses on this, as it's been bugging me for a while.
    bowlhead99 wrote: »

    As an American you have a pretty good return. However as a Brit it's not so rosy. $16,800 is worth £10,000 today, just like $15400 was worth £10000 a year ago. In pounds, you didn't made any money.
    Ok, that seems to make sense, but surely the curve of the graph representing the ETF would still pretty much mirror the US stock market, even taking slightly different inflation rates or exchange rates into account wouldn't they? Or am I massively underestimating how important those factors are?

    gadgetmind wrote: »
    .As for why your ETF hasn't tracked the US market, which ETF are you looking at and which US market?

    I've been look at the SPDR S&P 500 UCITS ETF (SPX5) which, as you can see has had some pretty big peaks and troughs over the last year.

    Thanks massively again for your help!
  • bigsy
    bigsy Posts: 178 Forumite
    You may get more accurate or up to date information from the ETF provider rather than your stockbroker.

    For example, the SPX5 PDF at http://www.spdrseurope.com/library-content/public/SPY5%20GY_factsheet_en.pdf states that it pays a quarterly dividend.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Post of the Month
    Ok, that seems to make sense, but surely the curve of the graph representing the ETF would still pretty much mirror the US stock market, even taking slightly different inflation rates or exchange rates into account wouldn't they? Or am I massively underestimating how important those factors are?

    Correct - you are massively underestimating currency.
    I just compared the SPX5 to the 500 index chart using Google Finance. The shape is basically the same, considering currency.

    Remember that $1.68 today is worth same pounds as $1.54 at the start. This is 8% loss in sterling terms. But the gain/loss from currency differences has moved around over the year so it is not a fixed ratio of difference. When looking at the performance of the two on a chart, the lines might even cross each other rather than track perfectly and down

    But say your sp500 index goes up by 17.5%. $100 became $117.5. But remember dollars have lost value, or sterling has gained value, depending on how you want to describe it. The $117.5 is now worth only £70 (at 1.68 per pound). The original $100 cost you £65 (at 1.54 per pound). So your £70 compared to your £65 is only about an 8% return really.

    Other differences as mentioned by Gadget might come from whether dividends are included or excluded from the charts and of course a fraction of a percent for they operating costs of the ETF. And a bit of "tracking error" because these things aren't 100% perfect. But currency is the biggie.
  • bigsy
    bigsy Posts: 178 Forumite
    bowlhead99 wrote: »
    Correct - you are massively underestimating currency.
    I just compared the SPX5 to the 500 index chart using Google Finance. The shape is basically the same, considering currency.
    You might also compare SPX5 to its equivalent SPY5 which is in USD.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
    Part of the Furniture 10,000 Posts Combo Breaker
    bowlhead99 wrote: »
    Other differences as mentioned by Gadget might come from whether dividends are included or excluded from the charts

    And I've never bothered to check whether Google Finance includes them or not and I can't see an easy way to check/change this.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • sabretoothtigger
    sabretoothtigger Posts: 10,035 Forumite
    Part of the Furniture 10,000 Posts Photogenic Combo Breaker
    Not in google charts, not in most charts. FT can include divs.

    Many ETF are intended for day traders. You maybe best to check the small print, its not leveraged I hope but they might incur extra losses from costs anyway
  • theshortstack
    theshortstack Posts: 76 Forumite
    Ok, sounds like. I have been underestimating the value of the dollar against the pound.

    Thanks for all your replies - as I say, they're much appreciated as I've been trying to get to the bottom of this for a few days now!

    Cheers
This discussion has been closed.
Meet your Ambassadors

Categories

  • All Categories
  • 346.5K Banking & Borrowing
  • 251.3K Reduce Debt & Boost Income
  • 451.3K Spending & Discounts
  • 238.7K Work, Benefits & Business
  • 614.1K Mortgages, Homes & Bills
  • 174.7K Life & Family
  • 251.9K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 16K Discuss & Feedback
  • 15.1K Coronavirus Support Boards

Is this how you want to be seen?

We see you are using a default avatar. It takes only a few seconds to pick a picture.