Four ETFs to Add to Your Portfolio

The iPod changed the way we consume music, and (along with the help of file-sharing websites) turned the industry on its head.

We no longer have to pay for an entire album, and instead just download the hit single (word up, Bono).

Now another “i” product to hit Australia is promising to shake things up. While it’s been a mega hit in the United States and Europe, it’s taken its time to hit our shores – much to my frustration. Yet we’re not talking about some flimsy iPhone, but the launch of i-shares.

Barclay’s ETFs

Recently, Barclay’s Investors announced it is bringing its enormously successful i-shares Exchange Traded Funds (ETFs) to Australia.

ETFs promise to be a revolution for Aussie investors, offering us a level of choice that until recently was limited solely to the big professional investors.

ETFs are referred to as index funds, which means that they are designed to mirror the performance of a specific index (like the ASX 200). Instead of buying individual shares, these passively invested funds allow you to buy the market.

Much like the iPod, ETFs have achieved explosive growth abroad. Research by Morgan Stanley indicates there are now 950 ETFs worth about $1.1 trillion.

ETFs go international

Although Australia has for some time had local ETFs which replicate our local indices, this is the first time investors have had access to international offerings.

It appears that i-shares will start with about eight funds, but it plans to eventually list the 35 funds by the end of next year.

Earlier this year the most successful investor in the world, Warren Buffett, said that most investors are better off putting their money in low-cost index funds, (although he believes he can still outperform major market indices).

“A very low-cost index is going to beat a majority of the amateur-managed money or professionally managed money,” he said.

Trailing commissions unbundled

The real revolution that ETFs deliver is the unbundling of trailing commissions from financial products.

These have long been justified by financial planners as being their payment for giving clients the financial advice to enter the fund, which they get each year.

Which is fine, so long as you (a) receive the advice in the first place, and (b) understand that the planner will receive the kickback each year until you exit the fund (which could be in 20 years from now for long-term investors).

Now with i-shares, investors have the ability to meet with a fee-for-service financial adviser (whose advice isn’t compromised by commissions), and build a solid diversified portfolio.

They only pay for the advice once, which ultimately could mean thousands of dollars being diverted from the fund manager and the planners’ pockets to the investor.

Financial salesmen and slack index-hugging fund managers have been put on notice.

With one simple investment, much like buying a share in, say, BHP Billiton, you will soon be able to purchase a share that gives you exposure to the biggest companies in China, India, and a whole host of other countries.

ETFs also allow you exposure to a range of commodities, plus different industries such as technology, where one transaction can give you exposure to internet giants Apple, Google, Microsoft, Yahoo and eBay.

What investors control

As investors, there are only two things we can control: the fees we pay and the asset class we invest in.

Experts have found that these two factors determine the bulk of our investing returns (day traders, take note).

They are also the reason investing in ETFs makes so much sense.

Despite the commodities boom, Australia still represents only about 2 per cent of the world market.

Diversification

In order to be truly diversified (which means not keeping your eggs in one basket), we not only need to invest across a range of industries such as banks, resources, and telecommunications but also across different international markets.

Moreover, to be truly diversified you need to go one step further and include in your portfolio commodities stocks – precious metals like gold and silver.

Oil and basic commodities ETFs are also useful stocks because they generally zig when share prices zag.

Building a diversified portfolio was previously time-consuming and often costly, as these funds would need to be purchased on international exchanges, taking on board currency fluctuations and custody fees.

ETF fees

Yet it’s the fees that set ETFs apart from their retail fund friends. ETFs are dirt cheap, mainly because it’s not exactly rocket science to buy all the stocks in a given index.

Apple computer nerds can do it via some fancy software, which is why ETFs charge in some cases a tenth of what active fund managers do to manage your money.

Better still, they have lower turnover (and therefore create lower capital gains tax bills) to boot.

Despite ETFs being great investments, it’s highly unlikely that your financial planner will know much about them, and even less likely they’ll recommend them.

Four ETF portfolio additions

That being the case, here are four ETFs that could make good additions to your portfolio (well, once they’re all available):

S&P Global 100 Index i-shares Fund: gives exposure to the growth of the 100 biggest listed companies, which includes global brand names such as General Electric, Procter and Gamble, BP, Vodafone, Nestle, Pfizer, Toyota, Wal-mart, McDonald’s, Honda, and Nike.

Through sheer size many of these companies have the ability to exploit the opportunities that globalisation brings.

SHARES MSCI Emerging Markets Index Fund: provides exposure to fast-growing economies including India, China, Russia, Mexico, South Africa, Taiwan, South Korea, and Brazil.

This is possibly the easiest way to gain exposure to these countries. Emerging markets have been the hot investment for the past few years.

On a cautionary note, while the opportunities are immense, so are the risks.

The S&P GSCI Commodity-Indexed trust: tracks an index of 24 commodities, together with the i-shares gold, and silver trusts.

Although it could be argued that an investment in local resource companies will provide enough exposure to the commodities boom, China and India’s insatiable appetite for almost every commodity will bode well for investors with exposure to a broad range of commodities.

The i-shares S&P Global Technology Sector Index Fund: provides exposure to the biggest technology companies in the world including Microsoft, IBM, Intel, HP, Nokia, Google, Apple and others.

As technology re-creates the world, having a portion of your long-term portfolio invested with these global leaders makes great sense.

Tread Your Own Path!

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