Regular visitors to the site will know that most of the money that we invest in the Stock Market is done so using Exchange Traded Funds – more commonly known as ETFs.
But why do we rave about these awesome financial products so much? And why do we put so much of our money in ETFs over other investments such as Stocks, Bonds or even traditional funds?
We think that ETFs have contributed to much of the improved accessibility of investing in recent years due to their extremely low costs and transparency. The first ever ETF was launched only as recently as 1993 in the US, and it took a further 7 years for the first ETF to be listed on the London Stock Exchange.
Since then, money has been pouring into these products, and for good reason – they’re awesome! You may have seen our video series on ‘How to Own the World’, where we essentially bought into every single major listed company in the World. We did this with these little beauties.
Editor’s note: Don’t forget to check out the Offers page where we have hundreds of pounds of cash bonuses that you can snap up when you sign up to any of the investment stock market and P2P Lending platforms listed, including sign up bonuses on platforms that trade ETFs – Nutmeg, Freetrade and Trading 212!
YouTube Video > > >
What is an ETF?
We’ll get into the reasons why ETFs destroy other investments – but first what is an ETF?
An ETF (Exchange Traded Fund) is simply an investment fund that is traded on a stock exchange similar to shares. Most ETFs will track an index in an attempt to mirror its performance.
An index is a measurement of a section of the stock market like the FTSE 100 or the S&P 500. The FTSE 100 is the index composed of the 100 largest companies listed on the London Stock Exchange (LSE).
These companies are often referred to as ‘blue chip’ companies, and the FSTE 100 is traditionally seen as a good indication of the performance of the UK economy. In the UK whenever you hear about the Stock Market on the news, they will be referring to the FTSE 100.
An ETF will allow you to mimic as closely as possible the performance of the index. So, a FTSE 100 ETF should pretty much return the same as the largest 100 companies in the UK.
This is awesome, particularly for small individual investors like us because it allows us to not have to worry about stock picking or fund manager performance. We can sit back, relax and get awesome investment returns for an incredibly low fee.
There are several ETF providers in the UK, the most popular being iShares and Vanguard who both offer numerous ETFs, which you will be able to buy and sell through any decent Investment Platform. Some other providers include SPDR, Xtrackers, HSBC, L&G and WisdomTree.
Just to get a taste of how much money is invested in ETFs, the iShares S&P 500 ETF alone has assets under management of over $40 billion!
Why ETFs Destroy Other Investments
#1 – Access to Your Money
You can sell at any time during market hours, but of course the price you get will depend on market conditions at the time. But unlike traditional funds such as OEICs and Unit Trusts, ETFs offer minute-by-minute pricing because they trade on an exchange like a stock.
This also means that when you buy an ETF you know the exact price you will pay – but this can’t be said for when you buy a traditional Fund such as a Unit Trust. This is because when you place your order for a traditional Fund you don’t know what the price will be when it is executed – during the day the price may change.
This can even make ETFs appropriate for investors who trade more frequently, but we advocate long term investing.
The live prices of an ETF make them superior to open-ended funds in this regard because you can access your money immediately. OEICS and Unit Trusts only have daily prices and orders are processed daily. By the time you can get your money the price may be far lower than you were happy with.
#2 – Diversification
Just one ETF can give an investor enormous diversification that is not possible if they were to invest in individual stocks themselves. In a single purchase you can with some ETFs gain a position in thousands of stocks and/or bonds.
Diversification is key to spreading risk and is considered essential in the world of investing. As we mentioned in our World Portfolio series – see Episode 2 below – we advocate owning the world, and ETFs are the easiest way to achieve this.
Some people criticise diversification but, in our opinion, only a fool doesn’t diversify to some extent.
Individual stocks often fall and then never recover, whereas this can’t be said about the whole stock market. The market has periods of decline, but the trend has always been up over the long term. You can invest in the entire market by investing in certain ETFs.
YouTube Video > > >
#3 – Lower Fees
ETFs which are passively managed have far lower fees compared to managed funds. A managed fund has to pay an expensive investment manager and trades more frequently, so therefore has higher costs. This portfolio turnover increases the transaction costs that a fund incurs, which is ultimately passed back to the investor.
At Money Unshackled like to keep fees down to an absolute minimum, and some ETF fees are almost non-existent. If we use the iShares FTSE 100 ETF as an example, the OCF is just 0.07%. That would be a fee of just £7 on a £10,000 investment.
There is also no stamp duty when you buy an ETF whereas Stamp duty on UK individual shares is 0.5%. These charges don’t sound like much but really add up when you build and rebalance a portfolio, and the effect only compounds over time.
# 4 – Huge Choice
There are literally thousands of different ETFs to choose from. You are bound to find one that tracks something you’d like to invest in.
Our preferred approach is to build a core portfolio using a handful of ETFs that track the world market.
We then like to supplement it with additional investments that we feel give the portfolio a little boost, such as REIT ETFs or ETFs that give us exposure to smaller companies, which we expect to grow faster.
For inspiration a good tool to use is the website justETF.com, which has a very useful ETF screener allowing you to filter down until you find an ETF that you like the look of.
#5 Transparency
When we construct a portfolio, we like to know exactly what we are investing in and because ETFs track an index, they are totally transparent. You can easily see what the underlying holding are, but this just isn’t the case with managed funds. Usually you can only see the top 10 holdings.
This is a major problem because how on earth can you know what your exposure is? If you invest in 10 different managed funds – and each one holds some of the same shares – you could be massively over-exposed to these few stocks without even knowing it.
Luckily not a problem with ETFs!
In summary; ETFs are so damn awesome.
Do you agree with our view on ETFs? Or do you think there are better ways to invest? Let us know in the comments section below.
5 Comments
Awesome article lads. Love your YouTube channel as well. I’m about to start my own Vanguard Index Fund portfolio this April, so the information you’re giving is priceless. Keep up the good work!
That’s great to hear – get that Freedom Fund working for you!
Hi guys, I have enjoyed a few of your videos, but I need guidance on where to get started. I’m a beginner, and would like to start investing, but have no idea where to start.
Platform, stocks and shares ISA, H&L, II or Nutmeg!
I cannot find a video in your channel for newbies. I’d like to also know where I could use multiple platforms, i.e. nutmeg, and another online platform.
Check out our World Portfolio series on YouTube (it’s a playlist of 4 videos) for how to buy into stock markets yourself and properly diversify. If you want super easy, then a platform like Nutmeg will hold your hand all the way. II and H&L aren’t really for newbies – you need to know what you’re doing and understand the complex fees involved. Stocks & Shares ISAs are best to use to save on tax, but you can only have one – so choose wisely which platform you want to use it on. Otherwise you can sign up to multiple platforms, but use Regular accounts. If you’re about to sign up to a platform, the links on the Offers page will get you either some free cash, free shares, or reduce your fees!
Hey guys, absolutely love your content and think the UK definitely had a gap for this on YouTube!
I’m fortunate enough to have accumulated around 20k but it’s just sat in a standard bank account doing nothing. I’m looking at some P2P lending but want to get into ETF’s after watching your World Portfolio series.
I’m super new to investing, sorry if this question is silly. Do you aim to generate passive income from the ETF dividend payments or by selling the ETF shares in the future for a profit – or both?
Thanks,
Sean
Comments are closed for this article!