Many of you will be familiar with ETFs (exchange traded funds); others may not be. What is clear though is that they are taking the investment world by storm, not least because of growing disillusion with the performance of actively managed funds and the high charges demanded by the managers of those funds.
By the end of 2015 there was more than $2 trillion invested in ETFs, a figure, which may well already have surpassed $3 trillion and there were over 1,800 in existence offering different products covering almost every conceivable market sector, niche and trading strategy.
Another name for the style of investing epitomised by ETFs is passive investing, in contrast to the active investing mentioned above. ETFs typically don’t take a view, favour one stock over another or go liquid. Instead they are fully invested to mimic the performance of the index, which they are tracking.
A typical example would be the Powershares QQQ Trust Series, which tracks the NASDAQ 100 index. This is a big fund with over $50bn of total assets. It attracts great interest because of its high exposure to strongly performing technology shares.
The five biggest holdings are Apple, Microsoft, Amazon.com, Facebook and Alphabet. Between them these stocks account for over $21bn of the fund’s assets. This is not because the fund’s ‘managers’ think this is a good idea. It simply reflects the weighting of these shares in the NASDAQ 100 index, which is a modified capitalisation-weighted index of the 100 largest and most active non-financial domestic and international stocks listed on the NASDAQ system.
NASDAQ, itself, has an index but the acronym stands for National Association of Securities Dealers Automated Quotations. It is, or was, when it was launched, a more technology-based rival to the New York Stock Exchange and attracted technology-oriented issues accordingly.
The growing importance of technology means that in 2017 the NASDAQ exchange is probably more significant than the NYSE (the New York Stock Exchange).
As the ETF movement has matured giant fund management groups like Blackrock, who manage so many ETFs, have become ever more inventive with their offerings.
This has given rise to instruments like Boost NASDAQ 100 3X Leverage. This offers an ETF tracking the NASDAQ 100 index but exaggerates the results by using borrowings to multiply the volatility of the fund threefold.
If the underlying index rises 10 per cent this fund will rise 30 per cent and similarly on the downside. Over the last 12 months in which the NASDAQ 100 has risen over 20pc this fund has risen over 60pc.
If you like action with your investments, as I do, can live with the volatility and are a long term bull of US enterprise and technology the three times fund has to be the one in which to invest.
A similar opportunity exists with the UK’s FTSE 250 index, which covers the performance of the next biggest 250 UK-quoted shares after the FTSE 100. Since 1992 the FTSE 250 has risen 813pc v 219pc for the FTSE 100 (stuffed with under-performing oil, mining and bank shares) and 266pc for the FTSE All Share. A tracker based on the FTSE 250 clearly seems the way to go.
Once you accept that then again using leverage to up the ante makes sense, which leads to the Boost FTSE 250 2X ETF, which has been volatile since it was launched in September 2013 but has also been a great performer, doubling up on the performance of the underlying FTSE 250 index.
The ETFs mentioned above have a clear geographical focus on US and UK-quoted stocks respectively. There are many such geographically targeted funds, which have provided an attractive mechanism for investing in hard-to-research stocks on emerging markets.
A typical ETF based on emerging markets is the iShares MSCI Emerging Markets ETF, with net assets recently listed at $35bn. Performance since 2008 hasn’t exactly set the world on fire. Emerging markets are dominated by bank shares, zapped by the financial crisis and by mining and oil shares, which have been led lower by slumping commodity prices.
As a result prices are down on their levels since 2008 though there are encouraging signs of a rebound currently.
Some emerging markets are doing better than others. A good example is India, where the constituents of the indices are not the usual mix of bank and commodity shares but are more Western in type. The Sensex index is up some 50pc on its 2008 peak driving a better performance by India-focused ETFs.
One I have found is the iShares MSCI India Small-Cap ETF. This has been volatile since 2012 but around a strong uptrend so, at $43.23, the fund is up some 75pc since launch.
Also interesting is an ETF based on Chinese shares, with an emphasis on very large concerns like Tencent, Alibaba and China Mobile. The fund also concentrates on Chinese shares quoted in Hong Kong and on NASDAQ, where adherence to local listing requirements fosters greater confidence in accounting and reporting requirements. This ETF, the HSBC MSCI China UCITS ETF, has been a notably strong performer. Tencent and Alibaba are both stalwarts of the QL LivePortfolio.
In addition to the geographically focused funds there is a vast array of ETFs designed to capture the performance of fashionable sectors.
One example is the iShares Automation & Robotics ETF. I like it because of the pedigree (all the iShares ETFs are operated by Blackrock, which is US-quoted and the world’s largest fund manager with over $3 trillion of assets under management). I also like this one because it has been a strong performer and the theme is one with obvious resonance in a world in the early stages of an automation and robotics revolution.