Index Investing Europe – The Sequel
The terminology is confusing and messy, and names are used interchangeably.
An ETF, or Exchange-Traded Fund, is basically a fund which follows an index, a commodity, bonds, or a basket of assets in a passive way. Most are open-ended which means that they can absorb more invested money continuously (they adapt their stock quantities accordingly).
The other weird creatures in the ETF kingdom below (Spiders,tracker funds, ..) are basically all variations on an ETF. The main difference seems to be that they are issued by another financial behemoth, who wanted to invent their own name for what is really also an ETF. Sometimes there are small nuances or distinctions in how they operate or what limitations each has. Frequently all these names are just mixed and all called ETF in one formor another. A SPDR ETF or a tracker ETF etc.
ETFs differ from mutual funds because shares trade like common stock on an exchange. They are constantly changing their price throughout the day just like the index itself. Advantages of an ETF on a mutual fund: ability to sell short, buy on margin, and purchase as little as one share(there are no minimum deposit requirements).
Some brokers even offer no-commission trading on certain low-cost ETFs. I use these two brokers:
- De Giro (Dutch): they have an extensive list of ETF’s which you can trade for free, under certain conditions (first trade each month free, next trades free if no selling in between and if over € 1000)
- Lynx / Interactive Brokers (UK): free trading for ETF’s offered by Cambria, Eaton Vance, Global, Reality Share ETF and a few others.
It’s not that their commissions are high, but if it is free you can easily add shares each month. 12 times free equals …euh?
Is a specific type of ETF. BlackRock is the company behind the iShares family of ETFs.
ETFs from the Vanguard ETF family, formerly known as the Vanguard Index Participation Receipts (VIPERs).
Trackers = index fund
Synonym for an ‘index fund’ which tracks the index. In contrast to an ETF, tracker funds are structured as an open-ended investment company (OEIC), and priced once a day. Typically, there are no shareholder transaction costs for index funds, especially if you purchuse a fund’s shares in an account of the same company. Costs such as taxation and annual expenses however, are lower for ETFs compared to index funds. One is not necessarily worse than the other, it depends on you specific case. If you intend to save little by little, trading fees of an ETF could be worse than the annual expense ratio of an index fund. If you are already in FIRE heaven, and you let the remaining savings grow in your account, a minimal ETF annual expense could be the best option.
State Street Global Advisors’ Spiders (SPDRs) are index funds that were initially based on the S&P 500 index, but now also include other investment options as their popularity grew.
An example is the SPDR Dow Jones Large Cap ETF. Traditional SPDRs, for example, trade at approximately one-tenth of the level of the S&P 500. If the S&P 500 is at 2.600, for example, the SPDR ETF shares will trade at $260 per share.
Cap weighted vs equal weighted indices
Cap weighted indices have a larger stake in larger stocks. So if a large company is worth 10% of the entire index by market cap then it will account for a 10% portion of the index.
In November 2018, the largest stocks in the SP500 (Index of 500 stocks) was Apple, counting for 3.8% of the index instead of an equal portion of 0.2 % (= 1 / 500). The lowest weight was for number 505, News Corporation, with a 0.007 % weight instead of 0.2 %. So Apple weights more than 540 x News Corp, and a change in price of Apple will move the S&P 500 needle 540 times more than a change in price of News Corp.
That somehow undermines the principle of ‘diversification’. You think you have spread your dear savings across 500 (or really 505) companies of the S&P 500, but in reality, your diversification looks like this
|Top x companies of S&P 500||weight % of S&P 500|
The 5 so-called FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) represent more than 10 % of the S&P 500 (November 2018) !
Most stock indices are cap weighted because an index tends to represent the stock market of a country / region / industry / … And a company such as Apple is more influential than a lesser known midcap company.
However, small caps as a group historically have better returns. This is kinda logical. The heavyweight stocks are the ones which have been going up the most (in price). They are the ones which will increase less in the future than smaller, lower priced stocks. Stocks cannot keep on going up forever (well actually they can, but their speed of growth slows down). If you don’t get the point:
- in 1955 GM was the largest market cap. It went into bankrupcy later
- in 1987 it was IBM, followed by Exxon, GE, GM. Where are they now in the top largest market caps?
- in 2000 it was GE and Cisco
- in 2011 it was EXXON
None of these are in the TOP-10 today.
There have been efforts to create equal-weighted stock indexes, but these indexes are not popular, therefore much less available, and therefore expenses are usually higher. On ‘justETF.com’, out of 906 equity ETF’s, only TWO equal-weighted ones are listed. Examples:
|Index||Equal Weighted Index||Equal Weighted ETF|
|S&P 500 (US)||S&P 500 Equal Weight Index (S&P 500 EWI)||Guggenheim S&P 500 Equal Weight ETF (RSP)|
|S&P 500 (US)||S&P 500 Equal Weight Index (S&P 500 EWI)||Invesco Equally Weighted S&P 500 Fund Class A (VADAX)|
|MSCI ACWI (World stock market)||MSCI ACWI EQUAL WEIGHTED INDEX (USD)||GUGGENHEIM MSCI ACWI EQUAL WEIGHT ETF|
|STOXX 600 (Europe)||STOXX® EUROPE 600 EQUAL WEIGHT INDEX||Ossiam STOXX Europe 600 Equal Weight NR UCITS ETF 1C (EUR)|
Cap weighted indexes are not a huge issue. It’s just that the index performs less than its equal-weighted siblings, and you are less diversified than you think. That’s all. Whatever, I will (have to) stick to the more common and lower-fee market cap weighted funds.
Find your favorite animal
Investors will find tracker funds available for nearly every market index in the world. Well-known index trackers / ETF’s are:
|ETF Symbol||ETF||Asset type||Country||Index|
|CSPX||iShares Core S&P 500 UCITS ETF USD (Acc) (EUR) (CSPX)||Equities||USA||SP500 (^SP500TR )|
|MEUD||Lyxor Core Stoxx Europe 600 (DR) UCITS ETF (MEUD)||Equities||Europe||STOXX 600|
|XRES||Invesco US Real Estate Sector UCITS ETF (XRES)||Real Estate||USA||S&P Select Sector Capped 20% Real Estate (Net Total Return)|
|VUSA||Vanguard S&P 500 ETF||Equities||USA||SP500|
|VUSD||Vanguard S&P 500 UCITS ETF (VUSD)||Equities||USA||SP500 (SPX)|
|IEF||iShares 7-10 Year Treasury Bond ETF||Treasury Bonds||USA||ICE U.S. Treasury 7-10 Year Bond Index|
|IGOV||iShares International Treasury Bond||Bonds||World||S&P International Sovereign Ex-U.S. Bond Index|
|REZ||iShares Residential Real Estate ETF||Real Estate||USA||FTSE NAREIT All Residential Capped Index|
|500.PA||AMUNDI ETF SP 500||Equities||USA||SP500 (^SP500TR )|
|C50.PA||Amundi EURO STOXX 50 UCITS ETF-C EUR ES50 C||Equities||Europe||STOXX 50 EUR (FEZ)|
|IWM||iShares Russell 2000||Equities||USA||Russell 2000|
|EL4B||Deka EURO STOXX 50® UCITS ETF | EL4B||Equities||Europe||STOXX 50 EUR (FEZ)|
|WRD.PA||HSBC MSCI World UCITS ETF||Equities||Developed world||MSCI world (URTH)|
|MWRD||Amundi ETF MSCI World UCITS ETF DR (MWRD)||Equities||World||MSCI world (URTH)|
|MXWO||Invesco MSCI World UCITS ETF||Equities||World||MSCI World Total Return (Net)|
|S600||Invesco STOXX Europe 600 UCITS ETF (S600)||Equities||Europe||STOXX 600|
|XSX6||Xtrackers Stoxx Europe 600 UCITS ETF 1C (XSX6)||Equities||Europe||STOXX 600|
|IEPRA.PA||AMUNDI INDEX FTSE EPRA NAREIT GLOBAL UCITS ETF DR||Real Estate||Developed world||RE (FNRE.FGI)|
|VWRL||Vanguard FTSE All-World UCITS ETF||Equities||World||FTSE All World Index|
|R2US||SPDR Russell 2000 US Small Cap UCITS ETF (R2US) - replaces IWM||Equities||USA||IWM/R2000|
|IUSN||iShares MSCI World Small Cap UCITS ETF||Equities||Developed world||MSCI World Small Cap Index|
|CW8||Amundi Index Solutions – Amundi MSCI World UCITS ETF C EUR (CW8)||Equities||World||MSCI world (URTH)|
|IEV||iShares S&P Europe 350 Index||Equities||Europe||S&P Europe 350 Index|
|IYR||iShares US Real Estate ETF||Real Estate||USA||Dow Jones U.S. Real Estate Index|
|SSAC||iShares MSCI ACWI UCITS ETF (Acc) (SSAC)||Equities||World||All Country World Index (ACWI)|
|SWTX||Schwab Total Stock Market Index||Equities||USA||Total Stock Mkt Idx|
|DIA||SPDR Dow Jones Industrial Average (DIA)||Equities||USA||DJIA|
|DJ600/OLYH||Dow Jones STOXX 600 Index||Equities||Europe||STOXX Europe 600|
|SCHH||Schwab U.S. REIT ETF||Real Estate||USA||Dow Jones U.S. Select REIT Index|
|FEZ||SPDR DJ Euro STOXX 50||Equities||Europe||STOXX 50 EUR (FEZ)|
|GLD||SPDR Gold Shares||Physical Gold/ Silver||World||Price of a tenth of an ounce of gold|
|VFIAX||Vanguard 500 Index Fund Admiral Class||Equities||USA||SP500|
|QQQ||Invesco QQQ||Equities||USA||NASDAQ 100|
|SLV||iShares Silver Trust||Physical Gold/ Silver||World||Price of silver|
|SPY||SPDR S&P 500 ETF||Equities||USA||SP500|
|STX||Dow Jones STOXX50||Equities||Europe||STOXX 50 EUR (FEZ)|
|VNQ||Vanguard Real Estate Index Fund||Real Estate||USA||MSCI US REIT|
|VXUS||Vanguard Total International Stock ETF||Equities||World excl US||FTSE Global All Cap ex US Index|
|VTI||Vanguard Total Stock Market Exchange Traded Fund||Equities||USA||CRSP US Total Market Index|
|VTSAX||Vanguard Total Stock Mkt Idx Adm||Equities||USA||Total Stock Mkt Idx|
|VT||Vanguard Total World Stock Index ETF||Equities||World||FTSE Global All Cap Index|
Please note that this list is only a tiny fraction of the ETF’s available! There are thousands of ETFs and trackers -the above ones are the mega – popular ones.
Also important: many of these are simply not available for European investors!! As a little solace, there are European substitutes for the indexes albeit more expensive than the original US versions.
My personal pets
This is more difficult than I thought. You can keep on thinking about it. Some people just use the S&P 500 and put all their money in it. That’s OK especially if you live in the US (you spend in the same currency). As a European, I considered investing in only the US stock market a bit limiting. These are the main thoughts making circles in my head:
- Different countries/ economies will flourish and dive down, and it is difficult to predict. You can look at the pricing of stock markets at any given moment, and e.g. conclude that today (end 2018) Japan is cheap, Europe is averagely priced and the US is expensive, but in the long term this will turn around. And around again. With a very-long term horizon it is better to take a world-wide approach. Geographical arbitrage will flatten out the dips in one continent with lesser dips or peaks in another.
- Another diversification is possible with REIT’s (Real Estate funds). I would like to get into Real Estate but owning rental properties is far too expensive in my geographical region, banks are difficult to give loans and I lack the experience. On top of that, REITs apparently give a return which is at least as good as the stock market. And REITs are less correlated with stocks, except in 2008 when the stock, financial and real estate market took a deep dive together but that was an exception caused by exceptional real estate / mortgage funding shabbiness.
So here are my requirements:
- A world stock index, all capitalisations, to smooth out up and downs of various economies.
- A world REIT for diversification to real estate with preference for the USA (developed world REIT ETFs have a large USA share anyway)
- A S&P 500 total return tracker because that is The Reference
- A € STOXX 600 tracker because Europe is cheap
- Accumulation /Total Return for tax reasons and because I’m building capital and not retired yet.
- Tracking error and expense ratio obviously as low as possible (but Accumulation is more important)
- Available at my current broker
- EURO currency when available
Filtering on these requirements gives me this final list (sound of drumrolls)
|ETF Symbol||ETF Name||Asset Type||Continent||Index||TER||ISIN (ID)|
|MEUD||Lyxor Core Stoxx Europe 600 (DR) UCITS ETF (MEUD)||Equities||Europe||STOXX 600||0.07 %||LU0908500753|
|IEPRA.PA||AMUNDI INDEX FTSE EPRA NAREIT GLOBAL UCITS ETF DR||Real Estate||Developed world||RE (FNRE.FGI)||0.24 %||LU1437018838|
|CW8||Amundi Index Solutions – Amundi MSCI World UCITS ETF C EUR (CW8)||Equities||World||MSCI world (URTH)||0.38 %||LU1681043599|
|CSPX||iShares Core S&P 500 UCITS||Equities||USA||S&P 500||0.07 %||IE00B5BMR087|