Choice of ETF denomination

[bejocomo]

Hi,

I am contemplating dipping my toe into passive investing via a monthly investment into a World equity tracker ETF.

One of the cheapest appears to be HSBC MSCI World.

I see there are three denominations (USD, GBP, EUR).

Being a UK resident it seems logical to opt for the GBP denominated ETF, howver the majority of the equities held are US based.

Does anyone have any advice regarding which to choose? Like most people I want to minimise currency risk whilst maximising returns and I am unfamiliar with how the returns of the different denominations of ETF may vary with time based on the earnings of the underlying assets.

Apologies if this is a particularly basic question, but I would be keen to hear others views.

Kind regards.

[bejocomo]

A bit of googling and I've answered my own question...currency risk only arises between your domestic currency and the currency of the underlying assets. The denomination is irrelevant.

[hiriskpaul]

If you are investing in pounds buy the GBP version. If you invest in the USD version your broker will convert your pounds to dollars and pocket some commission before buying the ETF. They will do the same when you sell.

There is no currency hedging with this product, so there will be no difference in performance between any of the currency versions once you are invested.

The ETF certainly looks competitively priced with a OCF of 0.15%, e.g. compared with the iShares version at 0.20%, but you might want to compare past performance as well since OCFs do not tell the whole story. According to the fact sheets, the HSBC fund has lagged the index by 0.29% annualised over 5 years, but the iShares ETF has lagged by only 0.01%. Some of that might be down to higher charges on the HSBC fund in the past though. The iShares ETF is also bigger ($8B compared with just $138m) and is invested across 1611 shares against 1043 for the HSBC ETF.

In addition, the iShares ETF reinvests dividends and that will save you money if you are intending to reinvest.

One other point is that both funds are developed markets only. If you want an ETF that includes emerging markets, the Vanguard ETF is better. It invests in about 3000 stocks and has a very small tracking error, comparable to iShares.

[mc2fool]

A bit of googling and I've answered my own question...currency risk only arises between your domestic currency and the currency of the underlying assets. The denomination is irrelevant.

Not quite. Where it becomes relevant is how you are providing the funds and who is doing the exchange. If you are providing GBP then it is likely that you will get a better deal buying the GBP denomination and, in effect, getting the institutional exchange rate, than asking your broker to buy the USD denomination and getting their (your broker's) "retail" exchange rate and commissions. Your mileage may vary

[hiriskpaul]

Part of the underperformance of the HSBC ETF compared with iShares was indeed down to a previously higher management charge on the HSBC ETF. They lopped 0.20% off earlier this year:

http://www.telegraph.co.uk/investing/fu ... -as-005pc/

[bejocomo]

Thank you for your replies.

The accumulating nature of the iShares ETF is very appealing, however it appears to only be available in USD?

I am not having much joy finding a list of accumulating/capitalising ETFs.

It has become apparent why owning ETFs for different geographical regions is preferable...the charges are in the region of 0.07% rather than 0.20%...

Kind regards.

[hiriskpaul]

The accumulating nature of the iShares ETF is very appealing, however it appears to only be available in USD?

I am not having much joy finding a list of accumulating/capitalising ETFs.

It has become apparent why owning ETFs for different geographical regions is preferable...the charges are in the region of 0.07% rather than 0.20%...

The GBP version of the iShares ETF is SWDA. USD version is IWDA.

Most of the iShares core series equity funds are accumulating. The only one that is not is the FTSE 100 ETF:

https://www.ishares.com/uk/intermediari ... &fst=50567

..but iShares do an accumlating FTSE 100 ETF as well should you want it. The ticker is CUKX and has the same 0.07% OCF as the Core series distributing FTSE 100 tracker.

It can be cheaper to hold geographic ETFs in place of a single world tracker, but it depends on your trading costs. For most accounts half a dozen trades usually costs more than one and those increased costs may outweigh savings in the OCFs. Holding geographic trackers means more control over precise geographic allocations and control over what goes in to ISA, SIPP and unsheltered dealing accounts as well. There are some people who consider this flexibility a bad thing! I hold separate trackers and it is certainly more effort keeping track of it all.

[hiriskpaul]

One thing I should mention about accumulating ETFs is that they still declare dividends and if you are investing outside a tax shelter then you need to declare these as foreign income on your tax return, even though you have not received them. You should also keep track of the dividend reinvestment so that you don't end up paying more capital gains tax than you need to when you sell. It can all get very messy unless you stay organised. If you hate admin as much as I do then it may be better to stick to ETFs that pay out dividends, even if they are not as efficient. Broker statements are not to be trusted when it comes to reinvesting ETFs or withholding tax on foreign investments either.

I have messed up my tax calculations a number of times on US investments. I have yet to be fined (probably because I have owned up before they spotted the problem), but I have been hit for interest. It can be annoyingly time consuming to sort out a tax issue when you do get it wrong.

If you are investing inside an ISA or SIPP, don't worry about any of this, reinvesting ETFs are fine.

[bejocomo]

Ah I had looked at SWDA previously and noted it as one of the best options. My search skills were obviously lacking earlier. I had also identified MXWS which reinvests dividends and has charges of 0.19%.

I intend to invest monthly inside an ISA wrapper so fortunately no tax issues to deal with.

Geographic ETFs are tempting but probably non-sensical given my planned modest monthly investment, but it may be worth revisiting in future.

Kind regards.

[Lootman]

Geographic ETFs are tempting but probably non-sensical given my planned modest monthly investment, but it may be worth revisiting in future.

One idea behind monthly investments is "pound cost averaging" - the idea that as long as you can sustain contributions through market cycles then you will gain by having bought more shares or units during down markets, and less when prices were high.

If that's the idea then it can make more sense to invest in more volatile issues and, typically, funds representing specific countries or regions will be more volatile than a global fund that shmushes everything together and therefore moves about in a more muted and sedate manner.

This is all predicated, however, on sticking the course and not bailing in bear markets.

My biggest concern with monthly savings into an ETF are the transactions costs for small sums. Ditto for the reinvestment of dividends.

[bejocomo]

Pound cost averaging isn't the intention per se, my age dictates that I don't have a lump sum to invest but I can invest monthly. The intention is to build a pot from which income can ultimately be drawn.

I suspect no one can know with any certainty where active or passive management will reign supreme in future, so I'm inclined to invest £250 monthly into CTY and MXWS or SWDA as a halfway house approach.

The investment charges for monthly investment is £1.50 plus stamp duty. The reinvestment of dividends will be cheaper for the ETF if I opt for an accumulating ETF I believe. I could save up and buy once annually, but the one of charge will be £12.95 plus stamp duty and I may be unfortunate enough to invest at the top of the market.

To a relative novice the abundance of options and the considerable variety of opinion regarding the source of returns from equities (such as dividends provide the bulk of returns, small cap besting large caps, the pros and cons of active and passive management, focus on income, focus on growth, geographical diversification etc.) is both bewildering and fascinating. I have bought a few recommended books to help me on my way.

[hiriskpaul]

MXWS is from Source. They are relatively new. Initially set up by a bunch of investment banks, but now majority owned (I think still) by a large private equity firm (I forget which one). Some of the charges look appealing and by the look of it the tracking differences have been improving, but they are closer to the way investment banks implement financial products using derivatives, than the way traditional fund management firms go about it with (mostly) physical replication. That is probably ok, but with OTC derivatives you always have to worry about the creditworthiness of the counterparty, or at least trust that whoever runs the ETF is properly managing credit risk. Based on banks track record (and experience working in them) I would prefer not to have to consider this at all and just go for established brands that use physical replication.

My order of preference would be something like Vanguard, Blackrock iShares, State Street, HSBC. After that I might look at others such as Source, Guggenheim, etc. if they offered something I could not get elsewhere or they offer a substantially lower price.

I understand perfectly what you mean about the bewildering array of products and opinions. It does not help that an enormous industry has grown that depends upon investors paying over the odds to have their investments managed. That industry will cherry pick facts and lie as far as regulators will let them in order to get their hands on your money.

As for your choice of investments, they seem sound enough to me. Personally I would not bother with CTY at all except perhaps with my speculator hat on if it was trading at a large discount to NAV. If you want a value fund, which I think CTY is but have not checked for a while, Vanguard have a new global value ETF (VVAL) which might be worth a look. Low charges, they describe it as actively managed, but from what I hae read quantitatively managed might be a more apt description.

[bejocomo]

That is useful to know, and not something I suspect many would have any awareness of. SWDA it is.

CTY is a UK Equity Income IT. I chose it on the basis it holds the usual 'high yield' suspects whilst potentially (!) benefitting from active management at minimal cost to the investor (0.43%). If a large proportion of total returns are derived from equities, this seems a reasonably sensible choice.

Investing part in passive and part in actively managed assets seems a reasonably sensible approach until such time as I settle on a single approach.

And now to Google, to learn about quantitative management.

Kind regards.

[Hariseldon58]

Sensible points from hiriskpaul

An alternative to swda is veve from Vanguard , a developed world tracker at .18%

Vanguard has very investor friendly policies.

[bejocomo]

I would probably opt for a Vanguard ETF if it was accumulating, however my understanding is that unlike SWDA it is not? I think SWDA will be cheaper in my circumstances as I won't need to pay to reinvest dividends.

[hiriskpaul]

One other factor to consider with dividends in an ISA is that your broker will pocket commission to convert them to pounds before you reinvest. The amount brokers charge for doing this varies, but 1% is a good ballpark figure. That means if the ETF yields 2%, you will lose 0.02% in the conversion of the dividends to pounds.

On the other hand, the advantage of dividends is that it gives you the choice as to where to reinvest. If you are investing in an IT that pays dividends anyway, you might want this flexibility. For example, having dividends provides the opportunity to periodically balance up the amount you have invested across your IT and ETF should you want to without necessarily having to sell part of either. Say after a year the IT has outperformed the ETF, you could invest all the dividends in the ETF, or if the ETF has outperformed, invest the dividends in the IT. Alternatively bring them back into balance with investments in both.

[hiriskpaul]

And now to Google, to learn about quantitative management.

Sorry about that. What I meant was that Vanguard will likely rely more on quantitative methods and models in making investment decisions, rather than human judgement from poring over the opinions and projections of analysts and economists or from cozy chats with directors.

[bejocomo]

Am I right in thinking there are no broker charges or commission in respect of an accumulating ETF such as SWDA?

I hadn't thought about the potential flexibility of dividends to aid rebalancing. My 'portfolio', if it can be called such a thing, is a bit of a mish mash of shares from my younger years and rebalancing is something of a distant proposition at the moment! It pays to plan though.

Perhaps I am niave in thinking the managers of large ITs gain credible insight into companies by meeting management teams? If so, there isn't much to be gained from perservering with actively managed investments...

Kind regards.

[djbw]

Geographic ETFs are tempting but probably non-sensical given my planned modest monthly investment, but it may be worth revisiting in future.

One idea behind monthly investments is "pound cost averaging" - the idea that as long as you can sustain contributions through market cycles then you will gain by having bought more shares or units during down markets, and less when prices were high.

If that's the idea then it can make more sense to invest in more volatile issues and, typically, funds representing specific countries or regions will be more volatile than a global fund that shmushes everything together and therefore moves about in a more muted and sedate manner.

This is all predicated, however, on sticking the course and not bailing in bear markets.

My biggest concern with monthly savings into an ETF are the transactions costs for small sums. Ditto for the reinvestment of dividends.

This is exactly why I chose a selection of individual Vanguard ETFs rather than just a single global tracker. I invest monthly into the one that's most below its target allocation. I also invest modest sums (due to not earning megabucks), hence investing only into one each time.

You could call it market timing, or you could call it rebalancing... If fluctuations around the mean of each region were to occur multiple times during my projected investment time period, then I'm of the impression that I'd benefit from any volatility.