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Abu Dhabi, UAEMonday 10 December 2018

Exchange-traded funds provide a benchmark handle

How to invest in ETFs in the major dividend yielding asset classes of stocks, bonds and real estate. And for those looking for something a little jazzier, why not try a commodities ETF.

Exchange-traded funds, or ETFs in the jargon of investment, are bought and sold like stocks on exchanges across the world through a brokerage and typically track an index. They first popped up more than two decades ago in the United States to give investors a speedy way to buy and sell the benchmark S&P 500 index of stocks.

Today ETFs have gone mainstream, with almost everything you can think of investing – from Mongolian stocks to wheat – represented by one of these funds.

ETFs are a great way for expats here to avoid the fees that come with traditional mutual funds. The average mutual fund fee is about 1.4 per cent, with some costing more than 2 per cent annually, while exchange-traded funds can charge as low as 0.04 per cent, such as Schwab’s US broad market ETF.

What should I invest in?

The less you know about investment, the best it is to keep your choices as broad as possible. One strategy is to spread your investments across the three major dividend-yielding asset classes of stocks, bonds and real estate investment trusts (Reits). The traditional model has been to invest 60 per cent in equities and 40 per cent in bonds, although with interest rates on the verge of rising, credit may not be a great investment.

If you fancy jazzing up your portfolio, you might also consider adding a commodities ETF that holds products such as gold, oil and wheat. While these are highly speculative, holding commodities can act as a hedge against inflation.

Here are the broadest and cheapest ETFs in these classes by the net expenses charged to you by the fund manager.

Stocks

The Vanguard Total World Stock Index ETF (the ticker VT US):

This ETF tracks the FTSE Global All Cap index, a measure that includes 6,588 stocks, of which almost 50 per cent are from the US. Apple, ExxonMobil and Microsoft are the fund’s largest holdings. The indicated yield for this ETF stands at about 2 per cent. After the recent sell-off in equity markets, this broad-based fund is the most attractive of the four reviewed. The expense ratio of this fund, which has a market cap of US$3.6 billion, is 0.18 per cent.

Real estate investment trust

IShares Global Reit ETF (REET US):

This ETF tracks 242 global real estate investment trusts in developed and emerging markets. When you own a Reit, you are a shareholder of a basket of properties that are professionally managed and you receive a share of the rental yield after management fees are taken. Reits are often described as being in the middle of the risk spectrum between stocks and bonds. The IShares Reit has a 3 per cent dividend that is paid out quarterly. The expense ratio of this ETF is 0.14 per cent.

Bonds

Vanguard Total International Bond Index ETF (BNDX US):

This ETF has a market capitalisation of $2.02bn and tracks 2,857 bonds globaly. Bonds may be the worst affected asset class when interest rates begin to rise again. Amid the global equity meltdown of the past few weeks, bond prices shot up. That means the yield you would be getting from this global bond fund, 1.26 per cent, is less than the yield you get from the Vanguard Total World Stock ETF. The expense ratio for this ETF is 0.2 per cent.

Commodities

PowerShares DB Commodities Index Tracking Fund (DBC US):

Most commodity ETFs are heavily weighted towards oil and gas. This fund gives you exposure to energy as well as other commodities including gold, silver, sugar, wheat and corn. Commodity prices have been subdued for several years amid low interest rates. This ETF has a market capitalisation of US$4.99bn and an expense ratio of 0.93 per cent.

How to buy ETFs?

All you need is a brokerage account with access to the main exchanges of, say, New York and London. There are two types: full service brokerages which offer high fees for research, and discount brokerages, which charge low commissions and offer only execution. Many of the discount brokerages such as Charles Schwab and Vanguard will now give you advice on your portfolio for a low fee. Brokerages usually ask the prospective client to send them proof of residence. Be warned, however, minimum starting balances vary from about $2,000 to $10,000.

Mahmoud Kassem is a banking and finance reporter for The National

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