How safe are ETFs for online investors?

masonic

seacaitch wrote: »

Agreed. My additional prudence is very much aimed at unlikely edge cases, plus a nod to balances above FSCS limits. I would not suggest otherwise.

Yes, and it's worth bearing in mind that balances several-fold above the FSCS limit could be at risk of a haircut. Figuring out the appropriate safety margin is not straightforward, but the Beaufort Securities collapse is a real world example of a likely near-worst-case scenario. Originally, investors stood to lose up to a third of their capital vs. £50k FSCS compensation. This loss was later capped at £10k per investor. Going on the original view, and with the compensation being harmonised to £85k in April 2019 for deposits and investments, I might be inclined to split at >£250k, but not before. A more or less cautious view could be taken.

talexuser

dunstonh wrote: »

Have you got a link to where it refers to ETFs from Vanguard getting FSCS protection?

No, that's why I said they have this
https://www.vanguardinvestor.co.uk/need-help/answer/are-investments-covered-by-the-fscs
without any specific qualification that it does not cover their ETFs, just saying "most types of investment", therefore somewhat confusing to the beginner.

londoninvestor

talexuser wrote: »

No, that's why I said they have this
https://www.vanguardinvestor.co.uk/need-help/answer/are-investments-covered-by-the-fscs
without any specific qualification that it does not cover their ETFs, just saying "most types of investment", therefore somewhat confusing to the beginner.

That is a little confusing, yes.

Page 3 of this document clarifies that the Irish ETFs are not covered by the FSCS of the equivalent. So (as other posters have said) if you used the Vanguard platform to invest in their Irish ETFs, the FSCS would cover you for a loss of your uninvested cash, but not for any loss due to fraud or maladministration of the ETF once you have invested in it.

dunstonh

talexuser wrote: »

No, that's why I said they have this
https://www.vanguardinvestor.co.uk/need-help/answer/are-investments-covered-by-the-fscs
without any specific qualification that it does not cover their ETFs, just saying "most types of investment", therefore somewhat confusing to the beginner.

I thought you were going to quote that. It is misleading. it is also unusually vague for vanguard.

bluefukurou

dunstonh wrote: »

Broadly speaking, ETFs are considered higher risk than the closest equivalent UT/OEIC. Partly as ETFs can have different replication methods which need understanding. The other being that there is no FSCS protection on ETFs.

So, you tend to find most start on UT/OEICs and the majority of people stick with those. However, some may add in the odd ETF.

ETFs can now cost more than UT/OEICs as well. So, on long term holds where you need to rebalance the portfolio, the annual charges may be similar but the trading charges on the ETF may nudge it over.

You would surely be rebalancing the portfolio?

I am not familiar with UT/OEICs, in fact I've never come across the term until now. Are you saying that for an expat, UT/OEICS are better than ETFs? All the brokers I'm looking at don't seem to even mention UT/OEICs, and therefore I haven't come across them.

The literature I've been reading is for expats and as I am overseas currently and expect to be for the foreseeable, ETFs are what keep being mentioned. The best approach from what I've read appears to involve investing consistently in 3-4 low cost ETFs that give you correct exposure to various markets, and do that over the long term, not panicking and selling when markets crash, and also, as you recommend, rebalancing from time to time.

dunstonh

I am not familiar with UT/OEICs, in fact I've never come across the term until now. Are you saying that for an expat, UT/OEICS are better than ETFs? All the brokers I'm looking at don't seem to even mention UT/OEICs, and therefore I haven't come across them.

This is a UK site that deals with UK consumers. It is probably a good idea to say that you are not in the UK and what tax regime you come under.

Unit Trust & Open Ended Investment Companies are the dominant method in the UK and EU.

The best approach from what I've read appears to involve investing consistently in 3-4 low cost ETFs that give you correct exposure to various markets, and do that over the long term, not panicking and selling when markets crash, and also, as you recommend, rebalancing from time to time.

A typical balanced portfolio covering the major sectors takes about 10 funds. You can reduce the number by having a global fund to replace US equity, European equity etc. It depends on how much control you want on the allocation weightings.

System

"Instead, the UK experience is advisers remain rooted to the traditional unit trust and OEIC alternatives, despite the poor track records of actively managed funds, which continually fail to beat their benchmarks." A quote from an article comparing ETFs and OEICS:
https://www.ftadviser.com/2016/04/05/training/cpd-tracker/virtues-of-etfs-compared-with-oeics-AWBW9rihYOhvHVYYOQxpAI/article.html

bowlhead99

bluefukurou wrote: »

I am not familiar with UT/OEICs, in fact I've never come across the term until now.

Just to add some colour:

A 'unit trust' or 'open ended investment company' are the two types of fund vehicles created in the UK in recent decades for investment funds into which you can subscribe for new shares, or redeem out of and get your money back, with (typically) a day's notice. They can have a wide variety of investment strategies, everything from mirroring the holdings of a particular published index to pursuing a highly active strategy following the convictions of the fund manager.

In continental Europe an OEIC is typically referred to as an investment company with variable capital (ICVC). In the US, the equivalent sort of thing (though technically different) would be a 'mutual fund'.

Whereas an ETF is a fund that is packaged up and traded on a stock exchange just like a direct ordinary share of a company. It doesn't require an intermediary to offer an investment 'platform' through which they facilitate your 'subscriptions and redemptions' because the fund manager is not trying to deal with individuals buying in and selling out of the fund, creating new shares and cancelling old ones. Instead, if you - the investor - want to buy a share in the ETF, you just put your order in and buy it on the stock market. When you no longer want it, you sell it on to someone else. Whether that's the London stock exchange or a French one or German one or Italian one; wherever the ETF chooses to be listed.

Are you saying that for an expat, UT/OEICS are better than ETFs? All the brokers I'm looking at don't seem to even mention UT/OEICs, and therefore I haven't come across them.

The type of brokers you are looking at are the ones set up to win the business of international customers with relatively cheap and straightforward investment options, rather than focus on a particular domestic market.

Rules and regulations on selling investment schemes and being an intermediary for investment services will change over time in different countries, and when you are working with expats who might have relocated to 150 different countries and who may continue to relocate over time, what sells well is a stockbroking service offering simple share-based products which are bought and sold by placing orders to buy or sell on major exchanges. Those shares / ETFs go up or down in value in line with the indexes they are built to track, and you can buy or sell based on the price for the ETF at any time of the trading day.

The literature I've been reading is for expats and as I am overseas currently and expect to be for the foreseeable, ETFs are what keep being mentioned. The best approach from what I've read appears to involve investing consistently in 3-4 low cost ETFs that give you correct exposure to various markets, and do that over the long term, not panicking and selling when markets crash, and also, as you recommend, rebalancing from time to time.

The comments about getting a balanced exposure, not spending too much on costs if you can help it, are all sensible. If you buy and hold for the long term you are likely to make money (assuming there is no structural failure with the ETF itself).

If I was writing a blog or a piece of fund marketing for the expat community (who have lots of different tax residences and will have different options in terms of what types of products can be pitched to them) I might try to pitch it simply and focus on how they could get exposure to broad markets by having parts of their portfolio follow indexes which they can see published in all manner of media, using products which might be listed in a range of currencies across multiple stock exchanges.

That type of service works for a Canadian relocated to Germany or a Brazilian relocated to France or a South Aftrican who is in Luxembourg or Singapor,e just as well as it works for a UK expat in Malaysia. The ETF investments can be sold to all those investors on an execution-only basis: i.e. the broker simply executes your trade instruction and buys somthing in the market and then you either get a share certificate or have it held electronically for you in the broker's nominee account; the investor knows what they are getting and the service does exactly what it says on the tin.

Whereas if am offering that service but also start offering OEICs / ICVCs which have particular rules on how they can be distributed and the strategies are more complex (active investment management which does something other than follow basic indexes up and down), pricing is not instantaneous etc then it becomes more complex.

An independent financial adviser knows all about what is available in the local market in which he operates, but an execution only broker offering services internationally is not trying to sell everything under the sun from tens of different jurisdictions on a broad 'whole of market' product platform. They will offer access to put orders in for you on the stock markets, where investors can buy shares listed in UK, Germany, Hong Kong, USA etc; but that is as far as they go. They don't have the appetite to offer a full funds platform with 3000 UK open-ended fund choices and 2000 German choices etc.

That means that although both UTs/ OEICs/ ICVCs on one hand and ETFs on the other can offer an investment strategy of tracking a particular index, you may find that ETFs are the only ones you can get from the DIY broker options that you list. ETFs are kind of a common language across countries for two reasons:

One, although a Brit might not know what a US mutual fund is, and an American might not know what a UK Unit Trust is, and a Hong Kong person might not know what a French SICAV-ICVC is, they all know what an ETF is because their domestic stock market regulations all allow them.

Two, as the vast majority of them track published stock or bond indexes (even if heavily-customised indexes), they are simple and cheap and recognisable from wherever you are investing in the world, compared to actively managed funds which a dedicated investment team will manage using closely-guarded secrets. And for people writing online literature or participating on discussion forums which promote 'passive' investing: nearly all ETFs are 'passive' index trackers, while only a certain proportion of UTs/OEICs/ICVCs are passive because there is a lot of active stuff.

Exchange-traded products have only been going a couple of decades whereas domestic 'mutual funds' or 'unit trusts' which can't be traded in real time on a stock exchange have been going much longer. So, while DIY investment bloggers on expat forums, and the internationally-marketing stockbrokers, are talking about ETFs as the standard thing to buy, it doesn't mean you can't get hold of those domestically-marketed funds using a platform that accepts foreign residents, perhaps with or through an investment adviser.

Back to the original question, the online broker as a custodian of your assets is going to be responsible for fixing his mistakes due to his errors or fraud, and if he fails to do because of going out of business you will get coverage from the insurance-type scheme run by his home country regulator, if there is such a scheme. E.g. FSCS or similar. Up to the limit per broker. However, a problem with the fund itself - investments lose excessive value due to fraud, failure of a counterparty to a derivative contract (Lehmans going under etc) etc - which is not the fault of your broker's negligence, would not be covered. Just like if you buy a share on the stock market of Woolworths or Blockbuster or Carillion and it turns out to be a bad decision.

It would simply be a case of, you bought a share on an execution-only basis without taking advice and now it's worth less than you paid for it, you knew what you were getting into and no compensation scheme will cover you.

So, if you are using ETFs, spread your assets broadly using different ETF management groups and operators. Not just 'in a diversified way across asset classes, periodically rebalanced' which is common sense whether you are using ETFs, OEICs or something else.

IanManc

Economic wrote: »

"Instead, the UK experience is advisers remain rooted to the traditional unit trust and OEIC alternatives, despite the poor track records of actively managed funds, which continually fail to beat their benchmarks." A quote from an article comparing ETFs and OEICS:
https://www.ftadviser.com/2016/04/05/training/cpd-tracker/virtues-of-etfs-compared-with-oeics-AWBW9rihYOhvHVYYOQxpAI/article.html

The way you are using that quotation is misleading as it is comparing actively managed funds with ETFs, which it assumes are all passive.

dunstonh

Economic wrote: »

"Instead, the UK experience is advisers remain rooted to the traditional unit trust and OEIC alternatives, despite the poor track records of actively managed funds, which continually fail to beat their benchmarks." A quote from an article comparing ETFs and OEICS:
https://www.ftadviser.com/2016/04/05/training/cpd-tracker/virtues-of-etfs-compared-with-oeics-AWBW9rihYOhvHVYYOQxpAI/article.html

If that sentence if an example of the quality of the article then its flawed. Comparing a managed fund failing to meet benchmark with a passive ETF indicates a lack of knowledge by the writer.
The comparison should be passive ETF vs passive tracker

The managed vs passsive debate is something totally different.

And its not difficult to know why ETFs have not taken off.
1) unbundling of UT/OEICs in 2013 brought charges down. So, the historic differences no longer exist
2) FOS.