A price war is helping Exchange Traded Funds (ETFs), which celebrate their 15th anniversary in the UK next Monday, remain one of the fastest-growing stock assets used by small investors.
Exchange Traded Funds celebrate their 15th anniversary in the UK next Monday and are one of the fastest-growing stock exchange assets used by small investors.
The first ETF to launch in 2000, the iShares Core FTSE 100, aims like a tracker fund to replicate the performance of the FTSE-100 at low cost. Last month it slashed its charge from 0.4per cent to 0.07 per cent, in a competitive market which is making passive investment even more attractive.
The ETF is now one of 781 to choose from, giving access to a wider range of markets than tracker funds.
Adam Laird, passive investment analyst at Hargreaves Lansdown, says: "We see investors holding ETFs as a core investment in their portfolio, as well as using them to access spicier areas of the market."
The popular Exchange Traded Commodities (ETCs) track the price of commodities such as gold, oil or agricultural products. ETCs took off in 2009 -10 as the gold price soared following Quantitative Easing and global currency devaluation.
However many investment platforms are geared only to funds and still do not offer ETFs, while many of those that do can only price them once a day instead of in real time.
The average charge on a European ETF is 0.33per cent, and many of the most popular invest in large, mainstream areas with charges under 0.2per cent.
The cheapest tracker funds still however compete, with Legal & General's FTSE 100, FTSE All Share and US trackers priced at from 0.06per cent with Hargreaves.
Jason Hollands at Tilney Bestinvest warns of a "staggering difference in charges" between funds such as Virgin UK Index Tracking (1per cent) and the lowest cost alternatives.
For the US market, Hargreaves says the Vanguard S&P 500 ETF combines a low annual cost with a tight bid-offer spread.
Mr Hollands says the PowerShares FTSE RAF US 1000 (cost 0.39per cent) tracks an index weighted on fundamentals such as revenue, cash flow, balance sheet strength and dividends, as opposed to market-capitalisation, which might be smarter with US markets so high.
For Japan, Tilney says the iShares MSCI Japan GBP Hedged ETF is more expensive at 0.64per cent than the Vanguard Japan Stock Index GBP at 0.23per cent, "but this ETF hedges the currency exposure to the yen back into sterling" , to protect against Japanese money-printing.
For emerging markets it suggests the Vanguard Emerging Market Stock Index GBP with an ongoing charge 0.27per cent.
Investors who veer off the beaten track into more niche ETFs need to tread with caution. Some ETFs use derivatives and leverage (borrowing), and many track relatively obscure indices.
When it comes to oil or gold, funds cannot physically hold commodities, but ETCs can. The Source Physical Gold ETC is backed by gold bullion, held in JPMorgan's London vaults and is one of the lowest cost ways for an investor to hold in gold, being highly liquid and with an ongoing charge of 0.29per cent, Hargreaves says.
However Calum Brewster, Barclays head of wealth in Scotland, says investors may not exactly get what they expect from oil ETFs, such as the very popular USO. "Returns from this ETF do not closely correspond to the returns from oil. ETF managers often sell expiring futures contracts at a lower price than they pay for the new futures contracts they buy each month. This so-called 'roll-over' is a common occurrence among oil ETFs which can leave investors frustrated. Many funds have been launched in recent years to help reduce this problem, but more needs to be done in this area."
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