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Why InvestwithQ uses ETFs Exchange traded funds are funds listed on the main stock markets which track the performance of a collection of shares. These shares could be those that form a well known index, such as the FTSE 100. This is tracked by the IShare FTSE 100 ETF with the stock exchange ticker ISF.L. Alternatively, it may be a collection of shares with a specific quality, like higher dividends, IUKD.L or a particular sector like property shares, tracked in the UK by IUKP.L . ETFs are cheap and easy to trade on modern online dealing platforms. They are essentially passive funds (i.e. there is no fund manger employed) and are created and managed on an entirely automated basis. As such, they have very low ongoing costs. Total expense ratios (TERs) on the bigger ETFs are less than 0.2% per year compared with most actively managed funds which are nearer 2% - or 10 times as expensive! The case for adopting a passive approach to share selection for private investors has been well documented by many investment intellectuals and there are some links to such bodies of work below. Suffice to say, over the long term, the additional cost drag of active fund management outweighs the likelihood of a fund manager beating the performance of any given sector or index through share selection alone. Add the cost of a share selection manager and a second portfolio manager who is going to decide which fund managers to buy and the odds are even more heavily stacked against the investor. Who is Behind ETFs In the UK the market is dominated by Barclays I Shares, soon to be owned by BlackRock the largest fund manager on the planet. In the US, the market is more diverse with a number of specialist firms creating products that go up when shares go down and multiply performance to give 2 or sometimes 3 times the performance of an index. An example of this is the power shares family which are heavliy utilised by day traders. The traditional, basic ETFs are run by such names as Vangaurd, Wisdom Tree and the SPIDER Series which contains SPY, the largest ETF of all, which tracks the S&P500 index. Focus on Asset Allocation not Share Selection Where portfolio managers can add value is on what is called in the trade 'asset allocation'. This is basically the desicion as to whether to be invested, or to hold cash. Then, if investing, which sectors of the markets to go into at any given time. For example, they would choose whether to go into shares or bonds and gilts. Then, within shares, whether to buy UK "shares of shares" from Asia or the emerging markets. These big picture decisons have by far the strongest impact on portfolio returns. By focusing on these decisions and utilising ETFs, InvestwithQ porfolios are both significantly lower cost whilst at the same time more actively managed than many alternative portfolio services. More examples of ETFs InvestwithQ's namesake the Qs Few British investors invest in technology companies, its a fact. The company in which we all invest through the FTSE 100 or almost every UK equity fund is Vodafone. It's a great company, but when we buy most British funds it's the only technology company of any size to which we get exposed. Yet most investors would agree that the future for the likes of Apple, Microsoft and all the other great technology companies looks pretty good right now. Their customer bases are constantly growing through the development of the emerging markets and it's 10 years since the dotcom bubble and these companies have matured. Now they have incredibly strong cashflows and balance sheets...shouldn't we be investing? Which fund manger should we choose? Well the easy answer is don't bother trying to find a fund manager. Look no further than QQQQ . This is the stock exchange ticker of the US listed ETF known as the Q's that tracks the Nasdaq. Its top 10 holdings include Apple, Google, Microsoft. Intel, Cisco Systems, Oracle and Blackberry maker Research in Motion. The fund has a total expense ratio of 0.2% p.a. and each day an average of 107 million shares in Q's change hands giving it a bid to offer spread that on most days is around 0.025%....so small you won't notice it. The Qs were established in March 1999 and is worth $16billion. It seeks to replicate the performance of the top 100 Nasdaq companies by owning some shares from each. For us, it epitomises an alternative way of investing - compared to paying 5% up front and 1.75% per year and worrying about which fund manager to use. We don't worry whether Apple will do better than Google, we know these great companies are doing something right to get to where they are in the top 100, so we let the index and the ETF take care of the stock selection. The Q's share price is currently around $40 which means on most days $4billion dollars worth of Q shares change hands! IFFF.L, IEEM.L, EUE.L and IWRD.L, Four fantastic ETFs that allow UK private investors to track markets in Asia (excluding Japan), Emerging markets (China, Brazil, India and Russia), Europe and the largest companies around the world through IWRD.L. The big attractions to investing in these ETFs as opposed to just tracking the FTSE 100 are;
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