Exchange traded funds (ETFs) have triggered an investment revolution, one that has put ordinary people in charge of their own financial destiny.
They have performed a particularly valuable service in the UAE, by giving expats and residents a low-charging alternative to the notorious 25-year insurance-based savings plans.
It is now possible for almost anybody to build a simple, balanced portfolio of ETFs for a minimal cost, without the need to use a financial adviser. At first sight, many people may think this is too complicated for them, but ETFs are not as difficult to understand as you might think.
An ETF is a type of investment fund that can be traded quickly and easily, just like stocks and shares, on a share dealing website or through an IFA that advises on this sector. They come with no upfront costs aside from your stockbroker's dealing charges and annual fees typically ranging from 0.05 per cent to 0.75 per cent.
There is no fund manager deciding which stocks and other assets to invest in, instead they passively track their chosen index, country, region or commodity, regardless of whether it goes up or down.
ETFs are taking over the world, as investors grasp the advantages.
The first ETF was launched as recently as 1993, but today the sector boasts more than US$4 trillion in assets under management.
There are thousands to choose from, and while the best-known track major indices such as MSCI World, the S&P 500 and FTSE 100, the majority do something a little more obscure.
Whether you want to invest in specific countries or regions, large, medium or small companies, government bonds, gold, crude oil, cocoa, water, carbon, cattle, corn futures, currency shifts or a stock market crash, there is an ETF for you. Be warned, the more niche you go, the more risk you may be taking on.
A strong core
Steve Cronin, the founder of wiseuae.com, a non-profit organisation designed to help UAE residents invest their wealth and avoid rip-off schemes, says investors interested in ETFs should start by investing in a handful of big global tracker funds. "First, build a strong core portfolio, giving you the widest possible exposure to global stock markets," he says.
To do this, he suggests buying a broad-based international ETF such as Vanguard FTSE All-World ETF USD (VWRD), which invests in more than 3,000 stocks around the world, with large exposure to the US, and charges totalling just 0.25 per cent a year. "You could put, say, 80 per cent of your long-term investment money into this fund and balance your stock market exposure with bonds, by putting 20 per cent in iShares Treasury Bond 1-3yr (SHY)."
Once you have built your core portfolio, you can then decide whether you are ready to take the next step, and invest in specialist ETFs, although Mr Cronin insists this strategy is not for everybody. “Adding specialist ETFs can be fun and challenging, but you need to know what you are doing. You should also limit your exposure to just 5 to 10 per cent of your total portfolio at first, and never go beyond 10 to 20 per cent.”
There are a host of ETF providers but the biggest are BlackRock's iShares, Vanguard, Deutsche Bank Asset Management's X-trackers, Invesco's PowerShares, State Street Global Advisors' SPDR and Lyxor.
If you decide, for example, that you want to invest in gold to balance risk elsewhere in your portfolio, you have a wide choice of ETFs.
There is iShares Physical Gold ETC (SGLN) or SPDR Gold Trust (GLD) to give you exposure to the gold spot price, while avoiding the trading and storage costs of buying physical gold.
Alternatively, you could invest in the fortunes of gold mining companies through iShares MSCI Global Gold Miners (RING), VanEck Vectors Gold Miners (GDX), or VanEck Junior Gold Miners (GDXJ). Or even bet against them, with ProShares UltraShort Gold Miners (GDXS), but here you are getting into even more complex territory, and this really is only for the professionals.
ETFs allow you to track the fortunes of a host of different commodities. Copper has a huge variety of industrial and commercial processes and the red metal’s price is therefore seen as a barometer of global economic health, hence its nickname Dr Copper.
The price has been rising after years in the doldrums and you can add it to your investment portfolio via Global X Copper Miners (COPX), iPath Pure Beta Copper (CUPM) or United States Copper Index Fund (CPER), among others.
There are also ETFs investing in almost every other precious and base metal notably silver, platinum, zinc, lithium, nickel, aluminium, lead and tin.
These are only for real investment nerds but you can gain exposure to the wider commodity sector through SPDR S&P Metals and Mining ETF (XME), iShares MSCI Global Select Metals and Mining Producers (PICK) or US Global GO GOLD and Precious Metal Miners (GOAU).
Or you can get exposure to shifts in the oil price through a range of trusts including ProShares Ultra Bloomberg Crude Oil (UCO), United States Oil Fund (USO) or accelerate your exposure with VelocityShares 3x Long Crude Oil ETN (UWT), which by the way, is down 51 per cent year-to-date as the oil price recovery stalls – this is the type of risk you may be taking with an ETF.
Sam Instone, the chief executive at independent financial advisers AES International in Dubai, hails ETFs for their flexibility and low charges, which allow people to keep more of the profits they make. “We believe passionately in the principles and benefits of straightforward evidence-based investing and simple, index-tracking ETFs are the best option for most expat investors.”
Country and regional trackers
Most people should take independent financial advice to build a balanced portfolio and limit risk, but AES has also created a “white list” of leading ETFs to consider.
This includes country and regional trackers such as iShares Core S&P 500 (IVV), iShares Core MSCI Emerging Markets (IEMG), iShares Core MSCI Pacific (IPAC) and iShares Core MSCI Japan (SJPA).
You could go off-list by investing in ETFs covering a host of other countries, for example, iShares offers a range of country specific funds tracking the MSCI range of indices, including United Kingdom (EWU), Germany (EWG), Australia (EWA), China (MCHI), Turkey (TUR), Indonesia (EIDO) and so on.
There is also a broad spread of ETFs investing in the Middle East, including iShares MSCI UAE Capped (UAE), iShares MSCI Saudi Arabia Capped (KSA), WisdomTree Middle East Dividend Fund (GULF), VanEck Vectors Egypt Index (EGPT) or you can get exposure to Egypt, Nigeria, South Africa and others through VanEck Vectors Africa Index (AFK).
If you want to invest in so-called frontier markets, which offer greater potential risks and returns than emerging markets, options include iShares MSCI Frontier 100 (FM), Guggenheim Frontier Markets (FRN) and Global X Next Emerging and Frontier (EMFM).
Mr Instone says you should not try anything too clever or too complicated unless you know what you are doing. "However, buying and holding ETFs can be more rewarding than trading individual shares."
He says the 2015 Dalbar study of US equity investors showed the average private stock market investor earned an average annualised return of 3.8 per cent a year over 30 years, while the S&P 500 returned 11.1 per cent a year over the same period.
"Individual investors under-performed largely as a result of their behaviour, such as trying to time the market or chase returns via overly complex investment solutions."
You can also use ETFs to balance your stock market exposure with government and corporate bonds, such as the SPDR Barclays International Treasury Bond (BWX), WisdomTree Strategic Corporate Bond ETF (CRDT), SPDR Barclays Long Term Treasury (TLO), iShares Core £ Corp Bond (SLXX) and Lyxor FTSE Actuaries UK Gilts (GILS).
Oliver Smith, a portfolio manager at IG Index, which has offices in Dubai, says US markets have risen strongly and there are a host of specialist ETFs giving you access, including SPDR Russell 2000 US Small Cap (R2SC) for smaller companies, PowerShares EQQQ Nasdaq-100 UCITS (EQQQ) for access to the booming technology sector, and for income investors, SPDR S&P US Dividend Aristocrats (USDV).
Mr Smith says: “US markets warrant a significant place in an investor’s portfolio due to the prevalence of existing high-quality businesses and the trend towards global technology, where companies typically choose to list in the US rather than on other international exchanges.”
The choice of ETFs is boundless, and Mr Smith picks out a range of other top options, including SPDR MSCI World Small Cap (WOSC), iShares Listed Private Equity (IPRV) and db x-trackers MSCI Europe Small Cap (XXSC).
Finally, globally mobile expats may want to use ETFs to hedge against currency risk on their investment portfolio, with options including PowerShares DB US Dollar Index Bullish Fund (UUP) or PowerShares US Dollar Bearish ETF (UDN), depending on where you think the dollar will go next.
Again, there are endless options ranging from anything from the Brazilian real to the Russian rouble, and niche territories to explore, such as the ProShares UltraShort Australian Dollar (CROC).
Naturally, funds like these are only for the select few, but somewhere out there is the perfect ETF for you. Just understand the risks.