The populist funds making money

Don’t waste money on mutuals with these cost-effective exchange-traded funds available, advises Harvey Jones

Exchange-traded funds (ETFs) have taken the investment world by storm, attracting more than $4 trillion over the past two decades. Crucially, they have also marked a shift of power from wealthy investment firms to private investors by slashing fees and charges to rock-bottom levels.

Investing in ETFs typically means zero upfront charges, whereas mutual funds can swallow 4 or 5 per cent of your initial investment before you get started.

They also have rock-bottom annual charges, ranging from just 0.07 to 0.50 per cent, which means you get to keep more of your gains.

By contrast, actively managed mutual funds can charge between 0.75 and 1.95 per cent a year.

Mutual fund managers say they can add value and earn their money by delivering market-beating performance. But research has shown time and again that three-quarters underperform their chosen index each year.

Even those who do occasionally beat the market struggle to do so consistently. Increasingly investors are taking note and voting with their wallets.

Sébastien Aguilar, co-founder of the non-profit community Common Sense Personal Finance and Investing in the UAE, says the majority of active investors fail to consistently beat the market.

He adds that a smarter option is to set up a DIY portfolio of passive low-cost funds and hold them for the long term rather than trading regularly.

“Investing a broadly diversified index of ETFs is an efficient and reliable investment approach, and is also cheap and simple to set up.”

But with more than 5,000 ETFs on the market, you will have to spend some time working out which ones to buy.

Sam Instone, founder of AES Investments in Dubai and one of the few expat advisers to recommend low-charging ETFs, says most ETFs are highly specialist and investors pick from a handful of funds.

“More than half of the huge ETF inflows in 2017 have gone into just 20 funds,” he says.

The five largest ETF providers, BlackRock iShares, Vanguard, State Street, Invesco and Charles Schwab, are responsible for almost nine out of 10 ETF sales worldwide.

The single most popular ETF worldwide is the SPDR S&P 500 ETF, which tracks the US index of top 500 companies and has a massive $296 billion under management, according to Track Insight.

It is followed by the iShares Core S&P 500 ETF with $154bn, and the Vanguard Total Stock Market ETF with $97bn.

The iShares MSCI EAFE ETF, which tracks midcap stocks in developed markets outside the US and Canada, and the Vanguard S&P 500 ETF, complete the top five.

Vanguard Emerging Markets ETF and Vanguard Developed Markets ETF also feature in the top 10, as do the iShares Core

MSCI World UCITS ETF and the iShares Core S&P Mid Cap ETF.

Mr Instone says the key is to build a balanced portfolio giving you access to different regions, countries and asset classes. “If you cannot work this for yourself you should consider taking fee-based advice to build your portfolio.”

Investors buy and sell in the same way they trade stocks and shares, instantly and for a small trading fee, which varies according to the site.

The best way to buy them is to do it yourself via an online stockbroker or advisory site in your country of origin, or a platform such as AES International (aesinternational.com), Interactive Brokers (interactivebrokers. com), Saxo Bank (saxobank.ae), Swissquote Bank (swissquote.ae) and Internaxx (internaxx.com).

ETFs have also liberated expats in the UAE from unscrupulous financial advisers selling expensive and inflexible 25-year insurance-based investment plans.

Which ETFs work best for you will vary depending on your personal circumstances but as a starting point, here are 12 expert recommendations:

Vanguard FTSE All-World UCITS ETF

Steve Cronin, founder of Wise (wiseuae.com), a non-profit organisation designed to help UAE residents invest their wealth and avoid rip-offs, says Vanguard FTSE All-World leads the pack for those who are seeking a core portfolio holding.

“It gives you huge diversification by holding nearly 3,000 stocks across 47 countries,” he says.

The fund has $1.72bn under management, charges just 0.25 per cent a year, and has grown 80 per cent over the past five years.

Vanguard FTSE All-World ex-US Small-Cap ETF

This fund attempts to track the performance of non-US global smaller companies, providing a convenient way to get broad exposure across developed and emerging stocks from around the world.

“This will suit investors who are willing to take some extra risk to access strong growth potential over the decades, although it should not make up more than 10 to 20 per cent of your portfolio,” Mr Cronin says.

This $5bn fund has an annual charge of just 0.13 per cent a year. It is up 70 per cent over the past three years.

iShares Core MSCI EM IMI UCITS ETF

Those who want increased exposure to emerging markets might consider this ETF tracker, Mr Cronin says. “Emerging markets have had mixed performance in recent years but the last 12 months have seen far better.

“You should aim to invest for at least 10 years and preferably longer.”

This $9.5bn fund is up 45 per

cent over the past three years and charges just 0.25 per cent.