David Stevenson has joined ETF Strategy as a weekly columnist. David is the author of the popular Financial Times Guide to Exchange Traded Funds and Index Funds and writes for the FT, Investors Chronicle and Investment Week. David has also become a shareholder in the company and will play an active role in its future development.
David Stevenson, columnist for ETF Strategy.
By David Stevenson –
I’m really excited to be writing a regular weekly column for ETF Strategy – in a very short period of time this online publication has established itself as the best source of analysis and research for investors who use exchange-traded funds (ETFs) here in Europe. Over the next year I can guarantee you that there’ll be many more developments at ETF Strategy, so watch this space!
Every week I’ll be supplementing Simon Smith’s excellent news and research service with a highly opinionated piece of analysis based around the ETF space – readers of my Financial Times books on the subject will know that I’ve been predicting for quite some time now that exchange-traded products (in all their varied shapes and sizes) will absolutely revolutionise investing as we know it.
And let’s be honest, the investment industry needs a good shake up. Costs are still far too high and although there’s an unprecedented amount of choice out there, unfortunately the tools to intelligently make decisions about which fund/index is right for you are thin on the ground. Which is where we return to ETF Strategy – I think it’s probably the biggest and best online resource for European-based investors in ETFs.
But investors and their advisers need to be constantly on their toes when it comes to using ETFs. The market is moving incredibly fast and that means that we’ve all got to make some difficult choices.
To understand this issue, let’s take a simple question – how does an investor buy access to developed world stocks across Europe including the UK?
The first answer probably is a simple geographical one – if it’s the UK, a FTSE 100 tracker, such as iShares’ ISF, is probably the best idea, but if an investor wants access to Europe as a whole then the Stoxx Europe 600 Index is probably the best benchmark choice. Investors may see the UK market as its own ‘island’ refuge from the troubles of the Eurozone but the grim reality is that our economic fate is still closely tied to that of the Eurozone, our biggest trading partner. The Euro Stoxx 50 of course is the preferred large-cap Eurozone index but it’s clearly a rather challenging index at the moment, whereas the Stoxx Europe 600 index (a whole host of ETF providers offer access to this index) combines both the European Eurozone opt-outs, including UK, Swiss and Swedish companies, and the key continental currency zone’s giants.
What’s even better news is that with the Stoxx Europe 600 you can track individual sectors within this broad index of large European stocks (Lyxor, db X-trackers, Source, iShares, ComStage and EasyETF all offer Stoxx Europe 600 sector ETFs). So if you have a contrarian bias you might buy the oil and gas sector (like I am), whereas if you are a cautious investor you might instead choose to focus on consumer staples – a fantastic Quant Quickie research paper from Andrew Lapthorne of Societe Generale recently suggested that the greatest selling point of most consumer brands companies is that they have strong defensive qualities with low volatility during market downturns.
But investors might also want to express a ‘style’ choice i.e. they might want to focus more on companies whose shares represent great value. Alternatively, style may be a bit of an old-fashioned way of analysing shares and maybe one should focus on different outcomes such as higher dividend yields or the latest hot idea, those stocks with the lowest relative volatility.
More short-term investors might focus instead on leveraged or geared tracker products, offering anything up to five times the return from investing in a major benchmark index.
The point of course is that the choice is almost endless – stretching from basic market access products which simply give you the biggest cross section of stocks through to next-generation fundamentally and technically weighted index variations.
Personally, I find myself shifting inexorably away from making broad brush investments in large markets – by buying say a Stoxx Europe 600 aggregate tracker – shifting instead towards three particular strategies:
1. Focusing on sectors like oil and gas or consumer staples
2. And a focus on indices that don’t use market capitalisation as a way of defining the constituents of an index. As a contrarian, I have a preference for dividend-orientated indices although I think that more generally fundamental-weighted indices are a good idea. Take a look at the indices underpinning SSgA’s ‘Dividend Aristocrats’ ETFs and Invesco’s PowerShares range, for example.
3. Indices using technical criteria and especially volatility are I think a brilliant innovation, especially for the less adventurous investor who wants to control their downside risk. Ossiam, Lyxor and iShares offer some very interesting products in this space. My only (small) caveat would be that many of the benefits of these newfangled indices could just as easily be captured using a simple sector tracker, focused maybe on consumer staples or utilities.
Over the coming weeks and months I’ll expand more on these views, always trying to give some practical advice to investors and their advisers – I’ll also do my damnedest to explain how I use ETFs within my portfolio! Next week I’m going to dig a bit deeper around the idea of defensive investing designed to reduce volatility within a portfolio.