Given that they offer instant access to a huge variety of assets via the stockmarket, and that they charge unusually low fees, it should be no surprise that exchange traded funds (ETFs) have slowly been gaining popularity in the UK. Part fund, part stock, ETFs act much like tracker funds in that their prices follow the performance of an underlying security or basket of assets, such as a stockmarket index, a sector, or even a single commodity. But unlike your average fund, they can be bought and sold on the stock exchange.
At the moment, Barclays Global Investors runs the majority of the London Stock Exchange-listed ETFs (49 out of 53), but now that stamp duty on ETF trading has been abolished, a raft of new players is appearing. Lyxor Asset Management, a subsidiary of Société Générale, has, for example, recently launched ETFs following the FTSE 100 and 250, both of which charge lower fees than their BGI competitors (BGI charges 0.4% a year, whereas Lyxor takes 0.3% and 0.35% respectively). Also on the way are a series of new launches that aim to give mainstream investors access to the niche areas of the market once reserved for big institutions. BGI, for instance, is planning to launch funds tracking real estate, water, timber, clean energy and infrastructure.
We like the sound of all these – if you want to buy into a specific bit of the market with as little hassle as possible, ETFs are the answer. Not everyone thinks buying into niche areas like this is necessarily a good idea. The problem, says Sonya Morris of Morningstar, is that most of those launched (there have been similar launches in the US) are in “hot areas” that “can be very alluring to performance-chasers”. They “pander to investors’ worst instincts”. Another worry is that the more specific the scope of an ETF (in the US you can buy them to just track cancer treatment or nanotechnology stocks, for example), the less diversified the portfolios within them and the higher the risk.
All this is true, but we can’t see how it makes a real case against niche ETFs. Sure, if you buy an ETF in a hot sector, you may find it disappoints in the medium term. But the same goes for a hot stock or a hot unit trust. And if you want access to, say, water, surely buying an ETF that tracks a basket of water stocks is less risky than buying an individual stock? Of course, one ETF doesn’t make a portfolio, but a group of them, carefully chosen, certainly can. For those who normally invest in sectors via individual stocks it means less work, and for those who usually buy unit trusts it means lower fees.