The essential guide to low-cost funds and ETFs

ETF fund essential guide low cost uae personal finance invest

The National has a Money Clinic every three weeks or so for readers’ questions.

This week, I explain how to invest with index funds and ETFs. There’s only space for 300-400 words, so this is probably the most concise guide I will ever produce. I had to leave a lot out, but what you’re getting here is exactly “the essentials”.

If you are able to invest over 10-30 years, then investing should be very cheap and straightforward. Note that you can get your money back whenever you want, at minimal cost.

Note that prices change all the time, so any fees quoted below should be checked on the company’s website.

My friends tell me that low-cost index funds or exchange-traded funds are the investment of choice these days. But how do I access these options? What is the minimum I can invest and what are the risks? JH, Dubai

Your friend is exactly right and don’t let anyone tell you otherwise – they are probably chasing a big commission.

Funds that passively track stock market indexes are attractive for two reasons: a) they give you access to a broadly-diversified range of stocks and b) they have extremely low costs. Minimising cost is one of the best ways to boost the growth of your portfolio and you should be relentless about it.

As an expat, it is easier to access ETFs than funds. Vanguard and iShares offer very cheap and reliable index funds. Being a British expat in my 30s, I might consider a portfolio like this:

  • 30% [i.e. roughly your age] UK government bonds – iShares UK Gilts 0-5yr UCITS ETF (IGLS, 0.2%)
  • 40% Global stocks – Vanguard FTSE All-World ETF (VWRL, 0.25%)
  • 30% UK stocks – Vanguard FTSE 100 UCITS ETF (VUKE, 0.09%)

[2018 update: these days I would probably recommend an even simpler portfolio of 80% FTSE All-World and 20% bonds.]

You need to tailor your own portfolio to your age, retirement timeline and home country.

Here are several platforms that are easy to use and cost-effective. Prices are simplified and based on buying UK-regulated investments denominated in US dollars (USD).

Interactive Brokers (US): $10,000 minimum investment, $5 per transaction, $120 annual platform fee.

TD Direct Investing, now Internaxx (Luxembourg): no minimum investment, €15 per transaction, €25-45 quarterly platform fee.

Saxo Trader GO (Dubai): $10,000 minimum investment, £8/$12/€15 per transaction.

AES International (Dubai) – £50,000 minimum investment, £50 per transaction, 0.35% + £500 annual fee. If required, AES will construct and manage a portfolio for 1-1.25%.

The biggest risk with a passive fund is the same for any stock – its value goes up or down with the market. Investing regularly and holding your investment for many years can help reduce this risk. Buying and selling an ETF can attract brokerage charges each time, so you should avoid frequent trading anyway.

If you invest without professional advice, you need an iron will to make sure you stick to your asset allocation and invest regularly to avoid buying high and selling low. Getting your allocation wrong and trying to time the market could lose you more than you save from low costs.

Some people say active funds protect your investment value better in a downturn but there doesn’t seem to be much hard evidence for this in developed markets like the US or Europe.

Other risks are easily avoided if you choose sensibly from the thousands of ETFs now available. Buy a ‘physical’ ETF that actually owns stocks over a ‘synthetic’ ETF. Ignore exotic ETFs for specific industry sectors or commodities.

Whatever you do, don’t invest in one of the long-term savings plans constantly being touted in the UAE. They have high fees, hidden charges and little flexibility. Few financial advisors will tell you that because they get huge commissions from them. The platforms listed above will make such advisors no commission but will save you a lot of money.

Have a look at the original article here to see another response to the question.

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