Thursday, 15 February 2007

In defence of ETF's

Over at interactive investor blog, they posted an article by Mr John Bogle (inventor of the tracker fund) about ETF's. Basically he's not a fan. This worries me as I've got a bit of money in some - an ishares china ETF and an ishares UK dividend ETF. Both had a very good year last year. In fact, if I had just put all my spare money in them, I would be typing this from a beach right now, asking Brandy if she wouldn't mind putting some more sun tan lotion on me while I wait for Roxanne to bring over my uber cold beer! Still fantasies aside, hindsight is a wonderful thing.

Mr Bogle basically thinks ETF's are a costly way of investing in an index. I can't see this being so. The cheapest FTSE trackers like the L&G one cost 0.5% per year, which is more than the UK Dividend ETF (0.40%). They don't pay dividends like the ETF's and their lack of transparency means you can't really time the market. In fact the China ETF that I have has a TER of 0.74%. There is absolutely no way that you can get exposure to Chinese stocks for less than 1.5% per year with a managed fund. I could argue more about the difficulty of transferring funds, etc. I guess also that Mr Bogle would counter with the transaction cost of buying an ETF, but if you pick your broker cleverly then that is never going to be more than £10 and if you buy on a regular investment plan (like Halifax Sharebuilder or Motley Fool's similar plan) then risk is spread throughout the year and transaction charges are minimal.

Another thing ETF's do is also enable you to follow strategies without having to think about them. The ishares UK Dividend ETF is considered a value tracker as it focuses on companies with high yield. If you like value shares, then there is nothing better than putting some money in this. In America they have loads of ETF's with different strategies and focus. Great fun.

Cost just can't be the issue with Mr. Bogle. I think he's probably just trying to defend his position as an overpaid fund manager, doing what most computers can do for us nowadays - tracking the index. Indeed more than 80% of managed funds do only as well (if not worse) than the index they are supposed to be investing within.

Useful links - ETF guide (written in american), ishares