Exchange traded funds, or ETFs, are the investing vogue of recent years.  Global assets held by ETFs are now worth a cool $4.2 trillion.

Moneycube explains what they’re good for, and why investment funds remain a better bet for most of our customers.

What’s an ETF?

Exchange-traded funds are funds traded on a stock exchange.  They usually aim to track the performance of an index of shares or bonds.

Cheap and simple… sometimes

Exchange traded funds have two big things going for them.  They can be cheap.  iShares offers one which tracks the FTSE100 with a Total Expense Ratio of just 0.07%, for example.

And ETFs can be simple, when they track a well-recognised index, and actually purchase the shares of that index.

But the proliferation of these funds has led to the creation of much more complex products.

Two kinds of complexity

Not all exchange traded funds fully track an index, for instance.

Instead they buy the largest shares in the index, in the expectation that they will broadly mimic the overall performance.

Some investment specialists worry that this increases the risk of a bubble.  It could become a vicious circle, they suggest, as investors’ money in ETFs continually follows the largest companies.

The difficulty is, no-one really knows how they will perform in a downturn.  In the last major bear market, ETFs were in their infancy.

And synthetic ETFs, to take another complex example, don’t actually hold the shares in the underlying index.  Instead they rely on an investment bank to pay them the return the index has generated.  That’s fine – unless the investment bank runs into trouble.  And we know how that can end…

The moral of the story

Buying simple ETFs cheaply can be a solid investment strategy, if you’re prepared to be a hands-on manager of your investments.

If you’re using ETFs to do anything different, tread with care.

ETFs are no good for regular investing

When it comes to regular saving in Ireland, good-value investment funds beat ETFs.

Because ETFs are listed on the stock exchange like a share, you’ll generally be charged stockbroker-level prices to buy them.

Davy Select’s Trading account, for example, charges a minimum of €14.99 to purchase shares in an ETF, or 0.5% of the value, if that’s more.  If you planned to tuck away €300 a month, you’d be wiping 5% off your money straightaway.

Someone still has to decide

If you have a lump sum to invest, it’s still hard to build your financial plan around exchange traded funds.

ETFs might look like they can make your life easy, because at a stroke you can own the entire market.  But ultimately, you still have to decide which ones to invest in.

It turns out that developing a truly diverse portfolio of shares, bonds, property and alternative assets via ETFs isn’t simple or cheap.

Investment funds OK

That’s why Moneycube believes cheap, diversified investment funds remain the right decision for the vast majority of Irish people who want to build their wealth.

In turn, those investment funds will often place your money in well-regarded ETFs.  That helps you gain the right exposures for your portfolio, at an attractive cost.

The advantage with this approach is that Moneycube – and the fund managers we work with – develop an appropriate portfolio for you, so you can focus on what you do best.


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