Your essential guide to low-cost funds and ETFs
My friends tell me that low-cost index funds or exchange-traded funds are the investment of choice these days. But how do I access these options? What is the minimum I can invest and what are the risks? JH, Dubai
Steve Cronin, founder of Wise, a non-profit community for financial education
Your friend is exactly right. Funds that passively track stock market indexes are attractive for two reasons: a) they give you access to a broadly diversified range of stocks and b) they have extremely low costs. Minimising cost is one of the best ways to boost the growth of your portfolio and you should be relentless about it.
As an expat, it is easier to access ETFs than funds. Vanguard and iShares offer very cheap and reliable index funds. As a British expat in my 30s, I might consider a portfolio like this:
• 40 per cent global stocks – Vanguard FTSE All-World ETF (VWRL, 0.25 per cent)
• 30 per cent UK stocks – Vanguard FTSE 100 Ucits ETF (Vuke, 0.09 per cent)
• 30 per cent UK government bonds – iShares UK Gilts 0-5yr Ucits ETF (IGLS, 0.2 per cent)
Tailor your own portfolio to your age, retirement timeline and home country. Here are three platforms that are easy to use and cost-effective:
• Toronto Dominion Direct Investing (Luxembourg, int.tddirectinvesting.com): no minimum investment, €15 (Dh62) per transaction, €25-45 quarterly platform fee.
• Saxo Trader GO (Dubai, ae.saxobank.com): $10,000 minimum investment, £8 (Dh42)/$12/€15 per transaction.
• AES International (Dubai, aesinternational.com): £50,000 minimum investment, £50 per transaction, 0.35% + £500 annual fee.
The biggest risk with a passive fund is the same for any stock – its value goes up or down. Investing regularly and holding your investment for many years can help reduce this risk. Buying and selling an ETF can attract brokerage charges each time, so avoid frequent trading.
Other risks are avoided if you choose sensibly – buy a “physical” ETF that actually owns stocks over a “synthetic” ETF and ignore exotic ETFs for specific industry sectors.
Whatever you do, don’t invest in one of the long-term savings plans constantly being touted in the UAE. They have high fees, hidden charges, little flexibility and financial advisers make huge commissions from them.
Sam Instone, chief executive of AES International
Passive funds such as “index” and “exchange traded” funds have recently exploded in popularity thanks to their diversification and low cost.
A passively managed fund aims to track the performance of a particular index such as the S&P 500 in the US or FTSE 100 in the UK. Because computers replace expensive and often fallible humans, the costs are substantially lower than on active funds. In consequence, developed investor markets such as the US and Europe have been transformed as trillions of dollars move from active into passive funds.
An index fund is no more safe or unsafe than the underlying investments that it holds. If you put 100 per cent of your net worth in an index fund specialising in junk bonds, you aren’t diversified, you just own a lot of different securities within the junk bond asset class.
Therefore, understand that asset allocation is a major driver of returns over the long term. For example, portfolios with a higher exposure to equities are likely to outperform those with a lower exposure over the long term. In addition, ensure you properly diversify your portfolio and the selected instruments match your risk profile.
When you invest in a certain country or market segment through an index or ETF, you rely on that economy or part of the market to grow so invest across a number of different assets, sectors, countries and market segments. You cannot fully insulate yourself from market downturns, but this way you can avoid huge losses if one area of the market falls.
Next month’s question:
I want to invest in stocks both locally in the UAE and overseas. What’s the best way to pick a good broker? I don’t want to be stung by unnecessary fees and heavy losses. IM, Abu Dhabi
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Updated: May 20, 2016 04:00 AM