Exchange Traded Funds (ETFs) are something I used to think of as investments for the lazy. The funds are managed for you and charge a fee for this luxury. Surely they take all the fun out of investing and the fee ruin your returns? Well after reading Graham’s book the Intelligent Investor I have seen the error of my ways.
Essentially ETFs that can be traded in much the same way as shares in companies are. You buy the shares in the fund which will turn own shares in lots of companies all related to a core purpose. For example, the Vanguard FTSE 100 fund has shares in the 100 companies which make up the FTSE 100 and aims to track the movements of that index. Other funds might focus on certain market sectors such as banking or oil and gas companies.
I used to dismiss ETFs as being for those to lazy to research their own stock picks but now I realise the key reason for owning them is for diversification. In one ETF you can own a small chunk of many companies. That means that for just one transaction and set of broker’s fees you can have a position in an entire market sector. If one company does badly, instead of losing a huge chunk or all your money your loss will be cushioned by the other companies in the fund. Obviously if the entire sector or index that the fund is tracking all do badly then you will still lose to some extent.
The main problem that still remains is that they are less exciting. If one company does amazingly well then your gains will be diluted by the average performance of the rest owned by the fund. It also means their is no reason to research companies yourself which I have always found to be the main draw to stocks.
Despite the lack of excitement, I have realised that for long term investments the ETFs which track indexes like the FTSE 100 and the S&P 500 are excellent options. You just squirrel your money away in them and leave them well alone. The fact that ETFs make investing so easy is just another plus when you have a busy lifestyle and don’t always have the time to dedicate to researching companies.
My favorite ETF at the moment is the Vanguard FTSE 100 tracker (Symbol: VUKE). It does exactly what it say on the tin and follows the FTSE 100 index. I chose the Vanguard fund as it seems to have quite low fees which is good too. I dare say I will eventually dabble in some more exciting funds focusing on specific market sectors This would require a little more thought to pick a growth sector and thus the return are potentially much greater.
I suspect now might be a good time to buy into an oil and gas ETF……..