Investors can hold shares and other investments in their own name. This is known as direct investing. Another way of investing is through ‘collective investments’ such as Funds and ETFs.
Actively managed funds offer the following services to retail investors:
The downside to the actively managed funds route is they cost money to provide the research and fund management capabilities. However, evidence would suggest few consistently outperform the markets.
Annual charges for offshore funds can range from 1.50% to 3.00% but I have seen as high as 8.00% per annum for some obscure funds.
ETFs have become very popular in recent years. Their objective is to track a market or index. The accuracy with which they do this and the charges they make will determine the return. As ETFs just track a market or index, they have:
Depending on the market and provider, ETF charges typically range between 0.05% and 0.75% per annum.
The methods of tracking an index or market fall into 2 broad areas: sampling and synthetic.
The sampling method works on the basis that most of the returns achieved are generated by a few large stocks within the market and so, the ETF provider buys physical stocks in say 80% of the market by capitalisation. Tracking may be less accurate but there is no ‘counter-party’ risk. Charges tend to be a little higher as the ETF provider needs to rebalance their portfolio on a regular basis.
The synthetic route works on the basis that the ETF provider buys a derivative from a bank linked to the performance of the market. This should provide a more accurate result but exposes the investor to ‘counter-party’ risk. This is the risk that if the bank went bust the investors would potentially lose their investment.
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