FUNDS

If you have lim­ited ex­pe­ri­ence with the mar­kets these prod­ucts could be the an­swer

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ETFs to help new in­vestors

With more than 2,500 open-ended funds avail­able to UK in­vestors, build­ing an in­vest­ment port­fo­lio from scratch can of­ten seem in­cred­i­bly daunt­ing. For new­bie in­vestors, many ex­perts sug­gest us­ing tracker funds as the start­ing point for your port­fo­lio.

Adam Laird, head of ETF strat­egy at Lyxor, says: ‘If you’re an in­ex­pe­ri­enced in­vestor, you want to fo­cus on sim­ple prod­ucts, main­stream stock mar­kets and low costs. There is no need to over­com­pli­cate things, and that’s why I think ETFs of­ten ap­peal to be­gin­ners.’

AC­TIVE MAN­AGE­MENT FAIL­ING TO DE­LIVER

Re­search has shown time and again that the ma­jor­ity of ac­tive fund man­agers fail to beat their bench­mark over the long-term, so it’s no won­der that a grow­ing num­ber of in­vestors are turn­ing to tracker funds in­stead.

Ex­change-traded funds, or ETFs, are low-cost in­vest­ment prod­ucts which aim to mir­ror the per­for­mance of a cho­sen stock mar­ket or as­set. Be­cause they are traded on the stock mar­ket, in­vestors are able to buy and sell these in­vest­ments im­me­di­ately at any given time just as with com­pany shares, and un­like funds which take at least a day to process a trade.

Trans­parency is an­other ben­e­fit of tracker funds and it can be a lot eas­ier to mon­i­tor your progress when in­vest­ing in a tracker rather than an ac­tive al­ter­na­tive. If you hold a FTSE 100 tracker then you only need to check how the UK stock mar­ket has per­formed to judge how your in­vest­ments are far­ing. Con­versely, an ac­tive fund may be a com­plex bas­ket of hun­dreds of dif­fer­ent com­pany shares, which may only be re­vealed to in­vestors once a year.

KEEP­ING COSTS DOWN

Us­ing ETFs at the core of your port­fo­lio can be a great way to

It brings home just what a great in­ven­tion track­ers are

keep costs down and en­sure your in­vest­ments are well­diver­si­fied, be­fore choos­ing spe­cific ac­tive funds in ar­eas of in­ter­est if you wish.

Peter Sleep, se­nior port­fo­lio man­ager at 7IM, ex­plains: ‘Most peo­ple have heard of the S&P 500 and the FTSE 100 and are able to fol­low these mar­kets on the TV or ra­dio, so track­ers that fol­low these indices make a good start­ing point for new in­vestors, as well as a strong core for those who are build­ing more so­phis­ti­cated port­fo­lios.’

As a start­ing point, he sug­gests the iShares Core FTSE 100 ETF (ISF), which tracks the largest 100 stocks on the London Stock Ex­change, in­clud­ing in­sur­ance group Aviva, Bar­clays bank and pharma gi­ant Glax­oSmithK­line. The tracker costs just 0.07% a year to in­vest in – equiv­a­lent to around 70p per £1,000 in­vested. Over the past five years the tracker has de­liv­ered a re­turn of 40.3% and also yields around 3.9%.

Track­ing the UK stock mar­ket is of­ten a sen­si­ble place for new in­vestors to start. Be­gin­ners will of­ten feel more com­fort­able putting their money into a stock mar­ket they can eas­ily track and one which holds a num­ber of com­pa­nies they have heard of. But stick­ing to a sin­gle stock mar­ket is risky as it means your in­vest­ments are tied to the for­tunes of that sole in­dex, so it makes sense to broaden out to other ar­eas too.

BROADEN YOUR HORI­ZONS

Sleep also sug­gests in­vest­ing in the iShares S&P 500 ETF

(IUSA), which tracks the largest 500 shares in the US in­clud­ing Face­book, Ama­zon and JPMor­gan. It has the same an­nual fee of 0.07% and a lower yield of 1.43%.

Over the past five years, as the US stock mar­ket has set a string of record highs, it has de­liv­ered a hefty re­turn of 79.8%. But while the US has de­liv­ered stel­lar per­for­mance in re­cent years, it has its own risks: the in­dex has a high weight to tech­nol­ogy stocks – around 25% – a cycli­cal sec­tor which is prone to sharp falls up

and down.

To off­set this risk, Laird sug­gests that in­vestors go even fur­ther afield. He likes the Lyxor Core MSCI World Uc­its

ETF (LCUW), which tracks an in­dex of 1,600 com­pa­nies across the world for an an­nual charge of 0.12%.

This in­dex of­fers ac­cess to stocks in the US, UK, Ja­pan, France and Canada among other coun­tries with in­vest­ments in the tech, fi­nan­cials and health­care sec­tors to name just a few. Over five years the in­dex has de­liv­ered a re­turn of 60%. Laird adds: ‘UK in­vestors tend to have a home­bias and of­ten in­vest heav­ily in UK shares, but this in­dex is broad and di­ver­si­fied.’

KEEP­ING IT SIM­PLE

Sim­plic­ity and cost are the two main advantages that are of­ten dis­cussed when as­sess­ing the ben­e­fits of track­ers but they also of­fer an­other great perk: di­ver­si­fi­ca­tion. Track­ers, many of which you can in­vest in for just £25 a month, al­low in­vestors to tap into an en­tire stock mar­ket or as­set class in one fell swoop. Sleep says: ‘When you think of it like that, it brings home just what a great in­ven­tion track­ers are.’ (HB)

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