That is because a synthetic ETF has entered into a contract to receive exactly the index return – any variation from that return is likely to be due to the impact of charges. We have highlighted funds’ tracking differences in this piece.ĮTFs generally track indices more closely than tracker funds, and synthetic ETFs trump their physical counterparts in this respect. This chart is a good illustration of what both figures mean. Tracking difference will be a more important figure for long-term investors to consider, while short-term investors will be more interested in tracking error. ‘Tracking error’ shows the volatility of that difference in return. Two figures are used to express this – ‘ tracking difference’ shows the difference in returns between a fund and the index over a given period of time. With both tracker funds and ETFs, an important feature to look out for is how closely they match the performance of the index they are tracking. No ETF has yet failed, but it doesn’t harm to know your rights. Rules around compensation overseas can differ from those in the UK, so it’s worth checking what they are before you buy. They will therefore come under the compensation scheme for the country in which they are based, such as Ireland and Luxembourg, both popular ETF domiciles, due to their benign tax rules for ETFs compared to the UK ( although this is changing). While both UK-based ETFs and tracker funds are covered by the Financial Services Compensation Scheme – protecting your money if the management company goes bust – hardly any ETFs are domiciled in the UK. It’s also worth noting the differences in investor protection. If that happens, investors will not necessarily lose all their money, as the swap deals will often be backed by collateral, although not in all cases. That method of securing exposure brings with it ‘counterparty risk’ – the risk that the bank doing the deal with the ETF provider goes bust. They will instead make a deal with a bank to match those returns in return for a fee. ‘ Physical’ ETFs also buy shares in the companies that make up the index they are tracking, but ‘ synthetic’ ETFs don’t. The same is the case for some ETFs, but not all. If a tracker fund is following the FTSE 100, it will own shares in the companies that make up the index. They can also differ in how they secure their exposure to the specific market they are tracking. Exchange traded funds are traded like shares and their prices move throughout the day. Tracker funds are mostly open-ended investment companies (Oeics) and so offer daily pricing as with actively-managed Oeics. Both track specific indices but differ in the way they are traded. There are two types of passive investment: tracker funds and exchange-traded funds (ETFs). So why not go for a low-charging passive investment, their fans argue, and guarantee that at the very least you are reducing the amount costs will eat into your return. Charges have a direct impact on the return you receive and, unlike the future performance of an active fund manager, are something you have control over. Passive investments are cheaper than active ones, in some cases by a significant amount. Add in the difficulty in predicting who the winning fund managers will be – as those that have done well in the past won’t necessarily be those who perform well in the future – and they say you’d be better off avoiding active managers altogether. It’s a zero-sum game, with the impact of charges skewing the picture towards underperformance rather than outperformance. There are a host of figures used to back this up, but the essential point is that since all investors collectively make up ‘the market’, they will collectively receive the market return minus any charges. Firstly, they say that on average, active managers underperform the market. Passive investment enthusiasts usually rely on two arguments to make their case. If you put your money into a passive investment tracking the FTSE 100, your returns will mirror the performance of the index, minus charges, for good or bad. It means you will be tied to the performance of a particular market. ‘Passive’ investing involves tracking an index, such as the FTSE 100, rather than relying on a fund manager to pick particular stocks and shares they think are going to do well – an ‘active’ investment approach. Passive investing has long been seen as the low-cost alternative to paying a fund manager to run your money, and those low costs are coming down even further.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |