Benefits of ETFs

Don’t put all your eggs in one basket

ETFs have been designed with the investor in mind. In a rapidly-changing world, the traditional approach of an investment portfolio based primarily around domestic stocks and bonds may not be the most appropriate approach.

Rather, we believe that diversification, or ‘not putting all your eggs in one basket’ is the best approach to take to ensure your investment portfolio can continue to offer good performance across a range of market conditions.

How can ETFs help you invest?

ETFs offer you instant exposure to a basket of securities, which helps you to spread your risk more widely. A basket of stocks can literally be as broad as a few hundred in the case of an index like the S&P 500 or as narrow as 30 holdings in the case of S&P Global Clean Energy. As ETFs are traded on exchange every day, they also represent a very convenient way of adding or removing exposure to a market or asset class when you want to. ETFs are very liquid instruments, as easy to buy and sell as any blue-chip company stock. Lastly, as an ETF holds all of the securities within an index, it is much more cost-effective than buying individual stocks, due to lower transaction charges.

ETFs also allow you to move into specialised, traditionally hard-to-access investment areas such as emerging markets and private equity. Markets that you may not know a great deal about. For example, consider China. The investment press has been full of praise for this fast-growing nation in recent years, but most private investors would not necessarily know the best companies to invest in, in order to ride the so-called ‘China boom’. With an ETF you simply buy exposure to multiple Chinese companies in one trade.

The beauty of building blocks

ETFs have a ‘modular’ structure. What this means is that each ETF can be used as a building block to form an entire portfolio, whether based on a single market (such as the UK FTSE 100) or as part of a more sophisticated investment strategy spanning many regions (European and Asian equity markets) or asset classes (developed equity, emerging markets or fixed income).

For example, you may have an investment portfolio concentrated on UK stocks but want to add a little bit of exposure to Asian stocks. Buying an ETF such as the DJ Asia/Pacific Select Dividend fund allows you to add some Asian exposure to your investment portfolio cost efficiently and easily.

Low fees

One advantage of ETFs is their low fee structure. ETFs have much lower total expense ratios (TERs - the total amount of money paid to cover the costs of fund management, trustees, licensing and operational costs) than traditional mutual funds or active funds, which means lower costs for the investor.

ETFs aim to match the performance of an index. This means they can operate on a much lower cost structure than actively-managed funds, which charge higher fees for the possibility – but not the certainty – of outperforming the market. Active funds also tend to buy and sell more frequently than index-tracking funds, which means there are higher transaction costs to take into account.

The average TER for fixed income ETFs is 0.25%, and the average TER for equity funds is 0.32%, making them among the cheapest funds on the market.

In Europe, the average TER for an active fund is 1.41% and for a bond fund is 1.06%. An average index fund has a TER of just 0.78%*.

In addition, UK investors pay no stamp duty on ETF investments.

A clearer picture

We have already discussed how ETFs reflect the performance of an index. We publish the performance figures for all of our ETFs online every day. You can also access the fund holdings of most of our ETFs. 

Risks: Keep in mind that the value of an investment may go up or go down. Check in the prospectus for specific risks and tax implications. For example,
investing in an ETF with an international focus might expose you to currency risk.

Source: BlackRock, ETF Research and Implementation Strategy Team. For ETFs the data is as at end February 2009. For active and index funds the data is captured from Morningstar on 20 March 2009.