Could ETFs rescue investors from a world of low returns?
Exchange-traded funds are growing in popularity so here are 10 things you need to know about them
Access all areas: ETFs promise low-cost access to a wide variety of asset classes all over the world. Photograph: Kimimasa Mayama/EPA
With deposit rates continuing to slide, it’s no surprise that a survey last week found that more than three-quarters of savers are unhappy with their returns. Indeed the research from Standard Life showed that if you’re earning just 1 per cent on deposit, the jump in deposit interest retention tax (Dirt) to 41 per cent from the start of this year means you might end up with an after -tax return of little more than 0.5 per cent.
If this isn’t enough of a return for you, you might want to try to get your money working harder for you by considering other options. One alternative that continues to grow in popularity is exchange-traded funds (ETFs). They promise low-cost access to a wide variety of asset classes all over the world. According to data provider Morningstar, for example, ETFs accounted for about 5 per cent of European fund flows in 2013; in terms of total assets outstanding, it represents a similar proportion. But what might you need to know about ETFs before you invest? And, given the changes in last year’s budget, are they still suitable for Irish investors?
For Eleanor Hope Bell, head of SPDR UK at State Street Global Advisors in London, a major advantage of ETFs is that they treat retail investors just like institutional ones. This means access to investments that might otherwise be closed off to a typical retail investor.
“You have very few vehicles out there where you have a retail investor and an institutional investor co-habiting in the same vehicle,” she says, adding, “that is very interesting. There is not a lot of product out there where the two have the same access point.”
In Europe, ETFs are typically structured as UCITS, which means that they carry all the protection associated with that structure for investors. But
they are bought and sold like a stock, which means that determining the market price of an ETF is a little different to a typical mutual fund, where the net asset value (Nav) is key.
The Nav of an ETF is calculated by dividing the number of shares in issue by the total value of the assets of the fund. But, as an ETF is traded like a stock, investors may be more interested in the “market price” of the ETF, which is determined – just like a stock – by supply and demand. ETFs are typically structured to keep the differential between these two values tight, so that the market price reflects the performance of the underlying assets.
Unlike your typical mutual fund, in which you might need to make a minimum investment of several thousand euro, you can purchase as little as one ETF share, so can start investing, and get exposure to a broad basket of stocks, with a minimal investment. The fact that an ETF is traded on a stock exchange means that Irish investors have access to a wide range of ETFs through their broker. Globally, investors have about 1,500 ETFs to choose from.
One of the great advantages of an ETF is the diversity the structure offers, with ETFs available which track the performance of nearly every market capitalisation, investment style and asset class – almost everywhere in the world.
Blackrock’s ishares range, for example, which accounts for 43 per cent of the ETF universe, offers investors 474 funds to choose from. Options include everything from an Asia Pacific Dividend ETF to an agribusiness ETF and a Turkish equities fund. Other major providers include Lyxor, which offers 250 ETFs and State Street, which has 55 ETFs in its SPDRS range.