Exchange traded funds (ETFs) have taken the investment world by storm, attracting more than $4 trillion over the last two decades.
Crucially, they have also marked a shift of power from wealthy investment firms to private investors, by slashing fees and charges to rock bottom levels.
Investing in ETFs typically means zero upfront charges, whereas mutual funds can swallow 4 or 5 per cent of your initial investment before you get started.
They also have rock bottom annual charges, ranging from just 0.07 to 0.50 per cent, which means you get to keep more of your gains. By contrast, actively managed mutual funds can charge between 0.75 and 1.95 per cent a year.
Mutual fund managers say they can add value and earn their money by delivering market-beating performance. But research has shown time and again that three quarters underperform their chosen index each year. Even those who do occasionally beat the market struggle to do so on a consistent basis. Investors increasingly are taking note and voting with their wallets.
Sébastien Aguilar, co-founder of the non-profit community Common Sense Personal Finance and Investing in the UAE, says the majority of active investors fail to consistently beat the market, and that a smarter option is to set up a DIY portfolio of passive low-cost funds and hold them for the long-term rather than trading regularly.
"Investing a broadly diversified index of ETFs is an efficient and reliable investment approach, and is also cheap and simple to set up. You can then sit back and reap the rewards of long-term market growth.”
But with more than 5,000 ETFs on the market, you'll have to spend a bit of time working out which ones to buy.
Sam Instone, founder of AES Investments in Dubai and one of the few expat advisers to recommend low charging ETFs, says most ETFs are highly specialist and investors pick from a handful of funds.
“More than half of the huge ETF inflows seen in 2017 have gone into just 20 funds,” he says.
The five largest ETF providers, BlackRock iShares, Vanguard, State Street, Invesco and Charles Schwab, are responsible for almost nine out of 10 ETF sales worldwide.
The single most popular ETF worldwide is the SPDR S&P 500 ETF, which tracks the US index of top 500 companies and has a massive $296 billion under management, according to Track Insight. It is followed by the iShares Core S&P 500 ETF with $154bn, and the Vanguard Total Stock Market ETF with $97bn.
The iShares MSCI EAFE ETF, which tracks mid-cap stocks in developed markets outside the US and Canada, and the Vanguard S&P 500 ETF, complete the top five.
Vanguard Emerging Markets ETF and Vanguard Developed Markets ETF also feature in the top 10, as do the iShares Core MSCI World UCITS ETF and the iShares Core S&P Mid Cap ETF.
Mr Instone says the key is to build a balanced portfolio giving you access to different regions, countries and asset classes, based on whether you are a cautious, medium risk or aggressive investor. "If you cannot work this for yourself you should consider taking fee-based advice to build your portfolio.”
Investors buy and sell in the same way they trade stocks and shares, instantly and just for a small trading fee, which varies according to the site. Many of these ETFs are available in dollars, sterling and euros.
The best way to buy them is to do it yourself via an online stockbroker or advisory site in your country of origin, or a platform such as AES International (aesinternational.com), Interactive Brokers (interactivebrokers.com), Saxo Bank (saxobank.ae), Swissquote Bank (swissquote.ae) and Internaxx (internaxx.com).
ETFs have also liberated UAE-based expats from unscrupulous financial advisers selling expensive and inflexible 25-year insurance-based investment plans.
Which ETFs work best for you will vary depending on your personal circumstances but as a starting point, here are 12 expert recommendations:
Vanguard FTSE All-World UCITS ETF
Steve Cronin, founder of Wise (wiseuae.com), a non-profit organisation designed to help UAE residents invest their wealth and avoid rip-offs, says Vanguard FTSE All-World leads the pack for those seeking a core portfolio holding. “It gives you huge diversification by holding nearly 3,000 stocks across 47 countries.”
The fund has $1.72bn under management, charges just 0.25 per cent a year, and has grown 80 per cent over the last five years. “If you want to spend just a few minutes on your portfolio every quarter then get on with your life, this is the ETF for you.”
Vanguard FTSE All-World ex-US Small-Cap ETF
This fund attempts to track the performance of non-US global smaller companies, providing a convenient way to get broad exposure across developed and emerging stocks from around the world.
Cronin says: “This will suit investors who are willing to take some extra risk to access strong growth potential over the decades, although it should not make up more than 10 to 20 per cent of your portfolio.”
This $5bn fund has an annual charge of just 0.13 per cent a year. It is up 70 per cent over the last five years.
iShares Core MSCI EM IMI UCITS ETF
Those who want increased exposure to emerging markets might consider this ETF tracker, Cronin says. “Emerging markets have had mixed performance in recent years but the last 12 months have seen far better. You should aim to invest for at least 10 years and preferably longer, and again, keep exposure to below 10 to 20 per cent of your portfolio.”
This $9.5bn fund is up 45 per cent over the past three years and charges just 0.25 per cent.
SPDR MSCI World Small Cap UCITS ETF
Small business indices often outperform the wider stock market over long periods of 10 years or more but with greater short-term volatility, Cronin says. “There are surprisingly few ETFs giving broad exposure to global small caps in developed countries outside of the US, but this is one of them.
Just over half the fund is invested in US stocks, with exposure to Japan, the UK, Canada and Europe. The $289m fund charges 0.45 per cent and has returned 33 per cent in the last three years. Cronin adds: "Once again, this is higher risk, so only invest a small part of your portfolio.”
ETFS ROBO Global Robotics and Automation ETF
Tom Anderson, investment manager at independent financial advisers Killik, who advises expat clients in Dubai, picks out an ETF for investors wanting specific exposure to the growing investment theme of robotics. “The ETFS ROBO Global Robotics and Automation ETF offers access to the entire value chain of robotics, automation and artificial intelligence by holding a basket of robotics and automation-related companies.”
The ETF holds 85 companies across 14 countries and invests in the robotics, automation and artificial intelligence (RAAI) sector. “This gives it a weighting towards the US, Japan and Taiwan with a bias towards mid-sized companies.”
The $63 million fund was launched in September. It is risky but potentially rewarding, and charges 0.69 per cent a year.
Vanguard LifeStrategy Fund
Sam Instone, chief executive of Dubai-based independent financial advisers AES International, recommends a range of funds rather than a single ETF. “Vanguard LifeStrategy Funds is an all-in-one ETF that gives you a low-cost, diversified portfolio.”
This allows you to invest globally without having to lift a finger, Instone says. “You select a blend of equities and bonds from a fixed set of choices and leave the rest to Vanguard.”
You can prioritise either income or growth, with the funds invested in equities and bonds in different proportions to match your appetite for risk. Average expense ratio is a lowly 0.14 per cent.
BlackRock Managed Index Portfolio
Instone’s second tip is not an ETF in itself, but a diversified multi-asset investment portfolio of low-cost ETFs.
Again, you can adjust the portfolio to match your attitude to risk, whether defensive, moderate or for more aggressive growth
Instone says: “The portfolio offers investors exposure to more than 250 different ETFs from the world’s largest asset manager BlackRock in a single wrapper. Low charges of 0.5 per cent a year mean that Blackrock hardly needs to promote it.”
Dimensional Balanced World Allocation 60/40
Global asset manager Dimensional aims to translate academic research into practical investment solutions, and Instone is a fan. “Its scientific approach has consistently beaten traditional ETFs, and this fund has more than $630m invested in over 1,200 global stocks and more than 750 bonds, with a management charge of just 0.35 per cent.
Instone says that Dimensional are “the ETF connoisseurs’ choice”. “It is loved by big institutions and professional investors who really know their stuff, but has so far been a well-kept secret from retail investors.”
This fund of funds has grown 49 per cent over five years from a lower risk portfolio of funds of which 40 per cent are bonds.
iShares Core S&P 500 UCITS ETF
Oliver Smith, portfolio manager at online trading platform IG Group, which has operations in Dubai, selects this popular ETF from BlackRock that simply tracks the S&P index of top 500 US stocks.
“This $25bn ETF is excellent value for an S&P 500 tracker that you could feasibly buy and hold for your entire investment lifetime.”
Minuscule charges of just 0.07 per cent a year also explain its popularity, Smith adds.
iShares Edge MSCI World Size Factor UCITS ETF
Smith tips another BlackRock ETF that could complement the S&P 500 tracker because it tracks smaller global companies, with 36 per cent of the fund invested in the US and 20 per cent in Japan, and the UK, Canada, France, Australia, Germany, Hong Kong and Switzerland also featuring. “Its greater focus on smaller companies makes it potentially more volatile with the scope for superior returns in the longer run.”
The $357m fund has ongoing charges of 0.3 per cent and has grown 10 per cent over the last 12 months.
db x-trackers MSCI Europe Small Cap
Smith’s third tip is another smaller company fund from Deutsche Asset Management, db x-trackers MSCI Europe Small Cap.
It focuses on Europe where stock markets have performed strongly over the last two years. “Europe’s improving economic fundamentals make smaller cap ETFs a good way to get exposure to rising company profitability.”
This $805m ETF is up 60 per cent over three years with total annual charges of 0.3 per cent.
iShares $ Short Duration High Yield Corporate Bond UCIT
This bond ETF seeks to track the performance of an index composed of high yielding corporate bonds priced in US dollars.
Smith says yield is still hard to come by with global interest rates near record lows, but there are now signs they could climb. “The US has started to tighten first and this has boosted dollar denominated bonds. The fund currently yields 5.3 per cent compared to 2 per cent for European high yield, an attractive income stream for bond investors willing to take on some risk.”
The $872m fund is up a steady 3.5 per cent over the last year and has ongoing charges of 0.45 per cent.