You might have heard a bit about ETF’s recently but what are they, how can you buy them and why are some investors so keen on them?
According to Investopedia an ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock.
Some of the most popular ETF’s include the SPY – SPDR S&P 500 ETF ( this was the very first exchange traded fund in the US and tracks the S+P 500 ), or if you are looking to invest in the emerging market countries the EEM iShares MSCI Emerging Markets ETF (some of it's largest holdings include Alibaba, Tencent and Samsung).
As an ETF by nature holds multiple assets instead of one stock it can offer instant diversification. However while an aviation focused ETF like JETS may offer multiple shares it’s important to note that it’s not truly diverse as it’s focused on aviation. However it 's spread of holdings (e.g Skywest, Southwest) will mitigate the losses of for example one share such as Delta going bust within the ETF. An ETF such as the Vanguard MSCI Index International Shares ETF it could be argued offers better diversification with it's holdings spread across the US, UK, Japan, France etc.
You can buy ETF’s through De Giro from as low as €2.30 for the ISEQ 20 ETF buying €1000 worth (the same transaction would cost €55 with Cantor Fitzgerald).
Actively managed funds would argue that with an ETF such as the example of the above EEM MSCI Emerging markets ETF, they just track the shares within the portfolio, if emerging markets go into free fall there is no floor, no manager who can intervene, mitigating risk and divesting certain assets and buying alternative investments to protect your capital.
The taxation of ETF's in Ireland can be a little confusing, in their excellent blog the folks at Informed Decisions look at it in more details here. While they break out and explain fully on their site, here is a snapshot: 'If investing in Irish Domiciled ETFs one will pay approx 41% tax on dividends & will pay 41% on overall gains. You will have to pay any tax due on growth every 8 years (even if not selling them). This inhibits on the potential compounding.'''