What’s One Of Them, Then?
An ETF is simply an investment fund that is traded on a stock exchange similar to shares. If you want diversification, low fees and fantastic long term returns in the stockmarket, ETFs are our preferred vehicle.
Most ETF’s will track an index – this is a measurement of a section of the stock market like the FTSE 100 or the S&P 500. For example, a FTSE 100 ETF will mimic the performance of the whole FTSE 100, meaning that buy buying just the one ETF you are investing in 100 companies. If the FTSE went up, so would the ETF (same for down!). And yes, they pay out the dividends too!
Why ETFs?
- In our opinion they are the embodiment of the Stock Market. Over the long term, Stock Market valutions around the world have gone very much in the “up” direction, and ETFs track entire Stock Markets. They are the easiest way to ride the wave of natural economic growth. It wouldn’t be unusual to see returns above 7% from an average portfolio made up of ETFs. This is inflation-smashing returns without requiring any skill on the part of the investor.
- Even for the seasoned investor, layering your portfolio with a batch of ETFs provides you that diversification that a good portfolio needs, giving you more confidence to buy riskier individual company stocks on top.
- One of the great things about ETF’s is the choice – you can almost invest in anything you can think of. Our preferred approach is to invest in ETFs that tap into certain geographical markets – in this way we get coverage of most industries too. For example, we might choose 1 ETF that gets us exposure to US stocks and another for exposure to emerging markets.
- Low fees! Normal Funds employ Fund Managers to micro-manage them – since ETFs automatically move with the Stock Market Index, a Fund Manager (and their chunky salary) is not needed. Hence, lower fees!
Why Are Low Fees SO Critical To Success?
Despite appearing small, Investment platform fees and charges will eat away at your investing performance. This will cost a fortune over a lifetime. A 1% fee set against a 7% return makes your net return 6%, which can cost you potentially hundreds of thousands over the course of a lifetime of investing. Whereas a 0.1% fee on an ETF is barely noticeable!
How Can I Get Me Some Of Those ETFs?
There are a number of ETF providers in the UK, the most popular being iShares and Vanguard. Both offer numerous ETF’s, which you will be able to buy and sell through any decent Investment Platform (such as Interactive Investor, AJ Bell, Vanguard’s platform, and many others).
How Can I Get Me Some Of Those ETFs?
There are a number of ETF providers in the UK, the most popular being iShares and Vanguard. Both offer numerous ETF’s, which you will be able to buy and sell through any decent Investment Platform (such as Interactive Investor, AJ Bell, Vanguard’s platform, and many others).
UK investors will want to avoid complications from foreign fees and taxes by buying ETFs that trade on the London Stock Exchange, and yet hold assets in countries throughout the world. Remember, the ETF is traded on a Stock Exchange (like London), but the Index it tracks and the shares it includes can be based anywhere, such as the US or Europe.
#1 – iShares Core FTSE 100 UCITS ETF (ISF)
From the name you can see that this one tracks the FTSE 100 and is absolutely enormous in terms of fund size – with over £6.3b assets under management.
As UK investors we feel that this ETF should be in almost every single investor’s portfolio. You’re getting exposure to the biggest companies in the UK all for crazy low fee of just 0.07% – That’s just 70p for every £1,000 invested. It’s insane!
Don’t forget that just because they’re UK companies doesn’t mean its UK focussed. These companies operate across the world and in fact the majority of their earnings come from outside the UK.
The FTSE 100 is full of incredible dividend payers such as HSBC and Shell, so as you would expect this ETF has an excellent dividend yield of 4.15% and makes payouts on a quarterly basis.
Here you can see the performance over 10 years with dividends reinvested. The green line, which is the ETFs performance, covers the blue line, which is the actual FTSE 100. This is great news as it shows that the tracking error is almost non-existent. In 10 years, you would have almost tripled your money.
#2 –X-trackers FTSE 100 Equal Weight UCITS ETF 1D (XFEW)
This is one of our favourite ETFs because it invests in the FTSE 100 – but with a little twist.
One of the big flaws in the FTSE 100 is the top 10 holding make up about 44%, so it’s not as diversified as it appears.
However, the X-trackers FTSE 100 Equal Weight ETF invests 1% in each stock. This is a great idea because firstly, you get better diversification and secondly, smaller companies tend to perform better.
By allocating more of the fund towards the smaller companies, this fund should in theory outperform normal FTSE 100 trackers such as #1 above.
You can get all this for a reasonable fee of just 0.25%. The size of fund is tiny though in comparison to #1 above with just £16.1m assets under management.
#3 –Vanguard S&P 500 UCITS ETF (VUSA)
It goes without saying that every investor needs exposure to the world’s main market, which is the US.
The S&P 500 is the index that tracks its 500 largest companies, so what better way to gain exposure than to invest in an ETF that tracks this essential index.
The Vanguard S&P 500 ETF can do all this for just a tiny fee of 0.07% and you’ll get exposure to all the US giants such as Apple, Google, Amazon and so much more.
In fact, this is great for UK investors because our own stock exchange is light on tech companies but the US is packed full of them – and it’s these companies and companies like them that are most likely to see huge growth as they continue to innovate and dominate the world markets.
This table shows cumulative performance and you can see it has tracked the index very closely, which is exactly what we want to see.
Although the ETF hasn’t yet been running for 10 years, it’s interesting to see that you would have over quadrupled your money less any small tracking error.
#4 – Vanguard FTSE Emerging Markets UCITS ETF (VFEM)
We are all told that some of the best returns come from emerging markets, but you probably don’t have the knowledge to gain this exposure yourself. Well don’t worry, because this fund does it all for you!
You’ll get exposure to over 1,000 stocks across many of the fasting growing economies such as China, Taiwan, India, Brazil and so on. This is great as you get lots of diversification to companies and countries that are likely to outperform more established markets.
I know what you’re thinking – to invest in an emerging markets fund will cost you a fortune in fees. Well you’d be wrong! You can invest for just 0.25%, which is incredibly low based on what you’re getting.
It also has a higher than expected dividend yield of 2.63%. You might expect this to be lower due to the stocks that make up the ETF, so this is a nice sweetener to the growth we would expect from the ETF.
#5 – SPDR® S&P® UK Dividend Aristocrats UCITS ETF (Dist) (UKDV)
This ETF aims to invest in an index that tracks the 40 highest yielding UK Stocks that have maintained or increase dividends for 7 consecutive years.
We consider it a fund for reliable dividends (or as reliable as they come). We like this ETF because we love cash flow. There’s a saying that a bird in the hand is better than two in the bush.
The biggest problem with this fund is it only distributes dividends twice per year, which is a shame considering the stocks invested in are huge dividend payers themselves. We’d like to get our hands on these distributions quicker!
The fee on this one is slightly higher at 0.30%, which isn’t bad but we always prefer to see them lower – especially as its invested in accessible UK stocks.
