There is a revolution going on, one that is transforming the way ordinary investors build their wealth.
Exchange traded funds, or ETFs, have steadily been growing in popularity for years and are now hitting critical mass as people recognise their benefits
The total invested in ETFs and exchange traded products (ETPs) globally hit a new high of US$3.844 trillion at the end of February 2017, according to London-based research consultancy ETFGI. This followed record inflows of $68 billion in February.
Steve Cronin, founder of Wise (wiseuae.com), a non-profit organisation to help UAE residents invest their wealth, says ETFs have exploded in popularity with the main attraction being able to invest on your own. With a diversified portfolio, investors can sit back and take the passive approach.
“ETFs are great for expat investors,” says Mr Cronin.
“I like to keep my investing simple, so I can get on with the rest of my life – ETFs are ideal for this.”
ETFs allow you to build a flexible, low-cost portfolio of investment funds that you are free to buy and sell at any time. They are traded on the stock market like ordinary shares, quickly and easily, with standard share dealing charges.
BlackRock’s iShares is the biggest provider with $1.351tn of assets under management, followed by Vanguard with $675bn, State Street Global Advisors’ SPDR with $550 million and Invesco PowerShares with $120m, according to ETFGI.
ETFs may be traded like stocks but are passive investment funds that track a chosen index, sector, region, asset class or commodity, in fact pretty much anything you can imagine.
Private investors can build a balanced portfolio from thousands of ETFs which they can adjust at minimal cost as investment goals change.
You are not locked in at any stage or committed to funding a plan that no longer suits your needs, and there are no penalties when you sell.
You can make your own investment decisions or invest through one of the growing number of independent financial advisers who are switching on to ETFs. You will pay a fee for their advice but save money because your funds go into ETFs rather than pricier mutual funds or inflexible insurance-based plans.
Mr Cronin says that because ETFs can be traded like a share, it makes them easy to deal in. “There is always a price available and you can buy or sell them immediately.”
However, there is a bewildering choice of funds available. Most of the world’s ETFs are traded on exchanges – New York, Tokyo and in Europe – but increasingly they are popping up on smaller exchanges like Dubai and Cairo. The global ETF/ETP industry now has 6,699 products with 12,646 listings, offered by 298 providers on 65 exchanges in 53 countries, according to ETFGI.
Mr Cronin says 80 per cent of his core portfolio is invested in the Vanguard FTSE All-World UCITS ETF.
“For an annual fee of 0.25 per cent, it tracks the performance of 3026 stocks in 47 countries,” he says. “I might check the progress about once a month, sometimes less – it’s up 16 per cent from last year in dollar terms.”
And his advice for others: passive index tracking ETFs should make up the core of your portfolio. “This gives you exposure to an entire index in just one fund,” he adds.
Some ETFs let you invest in more than one index, giving you access to all the world’s major stock markets within a single trade.
You can invest in any major index for an annual charge of between 0.1 and 0.3 per cent per year, says Mr Cronin, ensuring your profits aren’t eaten up by fees.
You also have to pay a share dealing fee when you buy or sell, which ranges from $5 to $25, or a percentage charge, which differs according to the platform and trading package. You may also have to pay stamp duty on share transactions, which ranges from 0.15 per cent on a Swiss-based exchange to 0.5 per cent in the UK. There should be no other upfront fees or exit fees.
Overall fees are far lower than on most mutual funds, which carry initial charges of up to 5 per cent, plus an annual management charge of up to 1.5 per cent. You then have to pay advisory and platform commission or fees on top of that, while insurance plans can charge even more. Mr Cronin says that ETFs labelled “UCITS” are ideal for most UAE investors as they are based in the EU, whereas US-based ETFs may trigger an inheritance tax charge.
Andrew Hallam, author of The Global Expatriate’s Guide To Investing, recommends including a stock index from your home country as well as a global stock index, which provides exposure to stocks in every geographic sector.
“It would include developed and emerging market stocks,” says Mr Hallam. “Investors should also add a bond market ETF to add stability.”
You also have to choose a dealing platform; the UAE has several options, notably Interactive Brokers, Saxo Bank, Swissquote Bank and TD Direct Investing International. Alternatively, UAE-based independent financial advisers AES International also offers ETFs to clients, with advice.
And while too many mutual fund managers regularly underperform the stock market, the best can beat the market. Terry Smith at Fundsmith Equity has returned almost 170 per cent over the past five years.
Justin Modray, head of UK-regulated adviser Candid Financial Advice, therefore recommends using ETFs for exposure to heavily researched stock markets where outperformance is rare, such as the US S&P 500 and FTSE 100. “Reserve an actively-managed fund for specialist sectors such as smaller companies, technology, commodities or property.”
BROKERAGE OPTIONS
These five brokers all offer UAE investors access to ETFs. Here we compare the options:
Interactive Brokers (interactivebrokers.com) – online account
Currencies: There are multiple currencies on offer from the US dollar to sterling, the euro, Hong Kong dollar, Indian rupees and many more.
Account set-up: It's all online and can be funded by wire transfer or bank automated clearing house transfer. You cannot fund an account with a debit or credit card.
Minimum balance: $10,000 or currency equivalent. Accounts showing no balance will be closed.
Investment range: Thousands of different ETFs across North America, Europe, Asia Pacific, emerging markets and the full range of specialist sectors.
Charges and dealing costs: Choice of fixed and tiered pricing. Minimum dealing charge is $1, with a maximum 0.5 per cent of any trade value. For US ETFs it charges a fixed rate of $0.005 per share. It also offers 41 commission-free ETFs. There is a $10 monthly fee for inactive accounts.
Site extras: Online webinars or trading education events with more than 400 planned for 2017 and new users have a free trial with virtual money.
Saxo Bank (saxobank.ae) – classic trading account
Currencies: Trade with US dollars, while clients with a Premium and Platinum account can request a sub-account in a different currency.
Account set-up: Either an online or paper application. You must fund using a bank transfer initially but can register a credit card afterwards.
Minimum balance: $10,000 or equivalent for Classic account. $100,000 for Premium service level and $500,000 for Platinum.
Investment range: More than 3,000 ETFs and exchange traded commodities (ETCs).
Charges: A range of charging options, depending on your personal usage patterns. Dealing costs can be charged either as a flat fee, percentage charge or both. Minimum commission ranges from €12 (Dh47) to $15, depending on the exchange. There are no account administration charges, the site also offers a six months' inactivity "grace period" and an annual custody fee of 0.12 per cent.
Site extras: Investment seminars in local offices, simulation accounts, a free demo account, and equity research.
Swissquote Bank (swissquote.ae) – the expat account
Currencies: Multiple currencies including the US dollar, Swiss franc, euro, Mexican peso and South African rand.
Account set-up: New users can register an account via the website. They can fund the account with a bank transfer or credit card denominated in US dollars, euros or swiss francs.
Minimum balance: none.
Investment range: Global trading platform includes more than 2.7 million financial products including ETFs.
Charges: ETF trading costs 0.25 per cent of the invested amount, with a minimum fee of $35 but no maximum charge. You may also have to pay Swiss federal stamp duty of 0.15 per cent on some assets.
Site extras: Performance charts, Morning Star fund ratings, news, corporate calendar and currency calculator. The site combines an online bank account with a currency platform and global multi-asset trading service on a single platform.
TD Direct Investing International (tddirectinvesting.lu) – online investment account
Currencies: US dollar, euro, sterling, Canadian dollar, Swiss franc, Swedish krone, Australian dollar, Hong Kong dollar and Singapore dollar. Users can hold up to nine currencies at no extra charge in a multi-currency account. Foreign exchange fees start from 0.2 per cent.
Account set-up: New users can apply for an account online, funded by a bank transfer.
Invest and trade in more than 9,000 ETFs in 15 different countries including New York, London, Zurich, Singapore and Sydney.
Charges: Commission on US, UK and Canada trades start at €14.95 per trade plus a charge of 0.10 per cent, or just €14.95 if trading more than 10 times per month. No account administration fees for customers who place 12 or more trades over a three-month period. For clients who trade at least once (but less than 12 times) in a three-month period, the quarterly account maintenance fee is €25. Inactive clients pay a €45 quarterly fee.
Site extras: ETF selector and stock selector tool and Morning Star's equity research. Its Active Trading platform offers technical analysis research. Portfolio X-Ray tool allows customers to identify their portfolio's strengths and weaknesses.
AES International – The Index Account (aesinternational.com)
Currencies: US dollars, sterling and euros, with Swiss francs added soon.
Account set-up: Via a one-page application form, although online account opening is under construction. Funded by bank transfer.
Minimum investment: $10,000, £10,000 (Dh44,915) or €10,000 to open the account. Regular payment plans for $1,000, £1,000 or €1,000 a month.
Investment range: A risk-rated portfolio from a limited but diversified range of ETFs.
Charges: Simple charging structure of a flat 1.25 per cent of the portfolio value each year, an all-inclusive cost covering all platform charges. Underlying portfolio also has an ongoing charges figure (OCF) of 0.5 per cent, lifting total fees to 1.75 per cent.
Site extras: Key fund factsheets, blog and knowledge library. Information is limited because AES does not allow DIY trading.
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