Exchange Traded Funds

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  May 2009
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Exchange Traded Funds (ETFs) are a form of pooled investment, listed on the stockmarket, usually tracking an index or following a very mechanical investment style. They tend to have low management charges (since they require little active management) and don't incur many costs through "churn". They differ from investment trusts in that there is not a fixed amount of share capital. New shares can be created, or old shares destroyed, according to supply and demand. As a result they tend to track their underlying Net Asset Value (NAV) very closely.

I find ETFs useful when I'm unable or unwilling to buy individual shares in a particular market or sector. There are a few reasons why this might be:

I don't want to spend the time and effort to try and pick shares from all the foreign markets in the world. I barely examine a small fraction of the UK market as it is.
I'm not investing enough in international markets to make it worthwhile buying individual shares. I just want a decent, diversified exposure.
When it comes to investing in bonds, this is only practical via a trust or ETF, since typically bonds are issued in tranches of Ł50k.

I've considered achieving the same goal via investment trusts, but I'm put off by the high churn that most experience, and the high costs they incur as a consequence.

I hold four ETFs, all issued by iShares (the market leader):

IEEM, tracking an emerging markets index
IDVY, tracking a European high-yield index
IAPD, tracking an Asia/Pacific high-yield index
SLXX, tracking a UK corporate bond index

I used to hold IEER, IFFF and LTAM, which covered Eastern Europe, the Far East (excluding Japan), and Latin America, but I swapped those for IEEM, on the basis that it covered much of the same ground, and it was far simpler to hold a single ETF than 3 separate ones.

The 4 ETFs I hold constitute a reasonably large part of my portfolio. I plan to add to my holdings to increase my diversification internationally and by asset class.