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Weekend reading: More murky ETFs are on the way

Weekend reading

Good reads from around the Web.

It’s a truth universally acknowledged that anyone in possession – or pursuit – of a fortune will run up against a financial services industry determined to make life more complicated for them, in order to extract their portion of silver.

So passive investors should be concerned that the fast-complicating ETF sector is set to become more convoluted still.

The profusion of ETF types – synthetic, leveraged, short, sector-focussed, actively managed, and more – has already moved ETFs far from their origins as simple stock market-listed index funds.

And now Rick Ferri warns that rule changes by the SEC to make it easier for companies to launch ‘self-indexing’ ETFs will make things murkier still.

Ferri writes:

Soon there will be self-indexed ETFs that don’t follow any published index.

They’re secret.

Only the fund providers themselves will know how the index is constructed – and what’s in it – even though the ETFs will be marketed as passive indexing.

That authority behind the change, the SEC, is a US body, so initially this is a concern for US investors (and those who buy US-listed ETFs).

But where the US leads in ‘innovation’, the UK eagerly scampers behind.

As a result we will also need to be doubly alert to what we’re investing in.

That’s probably okay for Monevator readers. We’re all well aware of the need to check out which index our fund follows, how it is invested, where it is domiciled, and what it costs to run.

But the ordinary and clueless man or woman in the street hasn’t the foggiest.

Ferri notes:

If self-indexing sounds a lot like active management, it should, because that’s essentially what it is.

The requirements for self-index ETF holdings are identical to the website disclosure requirements applicable to actively-managed ETFs. So, why not just call this active management?

I suppose some ETF providers may conceivably use self-indexing to create real-but-cheaper ETFs that offer broad market exposure while saving some money paid to index companies.

But others will produce exotic ETFs that cost more to run and that are benchmarked – and marketed – using their own made-up indexes. These will be designed to either sell investors an exciting active ‘story’, or to provide a more flattering benchmark for performance than a vanilla index would.

Ho hum. As I said last week, the so-called ‘lazy portfolios’ will meet the needs of the vast majority of people who want to save and invest for their future.

Every time the financial services industry tries to make us forget that, somewhere out there a happy retirement dies.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: If you’ve run up a big bill on a 0% credit card like I have (for interest rate versus inflation arbitrage purposes, not to get into ‘real’ and hateful debt) then you might be interested in Halifax’s All in One card. According to The Guardian, a rebate brings the balance transfer fee down to 1%. So I could roll over my debt for about £40 and pay 0% interest for another 15 months. Stoozing is (almost) back!

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Is a stock market train wreck coming? – Wall Street Journal
  • Understanding ‘clean’, ‘unbundled’, and other fund types – FT Adviser
  • What to do when you have no investing edge – Forbes
  • Swedroe: Are passive investors suicidal? – CBS News

Active investing

  • Careful which AIM shares you put in your ISA [Search result]FT
  • The case for owning UK commercial property [Search result]FT
  • A ‘generational’ chance to sell bonds – MoneyBeat/WSJ
  • Don’t judge a fund by its cover – Wall Street Journal

Other stuff worth reading

  • Aging and personal finance: Time as money – The Economist
  • West Brom’s table-topping 1.48% fixed rate mortgage – Telegraph
  • The upside of certainty – Denton Record Chronicle
  • Family offices chase wealthy’s $46 trillion in assets – Bloomberg
  • Student costs of living: 1993 versus 2013 – The Guardian
  • How to run a successful Kickstarter campaign [Old] – Mint

Book of the week: Did you enjoy Pete Comley’s guest article on the history of UK inflation on Monevator this week? Then don’t forget his new book, Inflation Tax, is now on sale.

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 6 comments… add one }
  • 1 ermine August 10, 2013, 4:07 pm

    > If you’ve run up a big bill on a 0% credit card like I have (for interest rate versus inflation arbitrage purposes)

    Pray tell more? Is there something I am missing. Let’s say, for the sake of argument, you can borrow for 1% p.a. Where on earth could I stick that wedge to get a return on investment that is worth the candle – say 2% – I have the benefit of being a non-taxpayer 😉 I’ve already got a Nationwide Flexdirect account.

    What asset class are you buying that will hold it’s own against inflation for arbitrage purposes, now that Peter Comley’s scared the bejesus out of us all on that front?

  • 2 AlphaRodent August 10, 2013, 11:24 pm

    Oi, Ermine!

    You are retired a handful of years early, good for you mate. You did okish. You can really weigh up risk and reward.

    I borrow off a 0% CC because my mortgage charges 3.69%. I borrow off a 0% CC because Aberdeen High Yield Bond Class A Income offer a 7.9% dividend yield or the average dividend of a Ftse 100 company is 3% and also I have big balls (e.g. a basketball, rugby league ball and a football). The handling fee is max 3% for up to 28 months. Do the mathematics as our US cousins don’t say!

    For the sake of argument I am young, worked hard, am working harder and my assets are working harder. Why wouldn’t you recruit a few extra k to work that extra bit harder?

    BRB how many BTL dudes started off with a CC?? (not my lifestyle but I know three)

    The real reason is because a spreadsheet told me and it worked before your golden oldie generation wrecked the economy/environment/world etc. and it still works now. When I grew up ads on tv encouraged you to consolidate loans so you could even have enough left over for a holiday or a car. Holidays over!!!! It’s hardworking time. The holiday is more risk than an asset.

    The extra risk i’m taking with a credit card is less than some of my peers brb drinking, drug taking, renting and studying non-job linked rubbish uni degrees, cheap hols abroad and some chit of geordie shore/Towie

    Peter Comley is scarier looking than his writing. Yeah, if you’re past it then inflation is scary but if you are ahead of the curve as judged by the behaviour of your peers in dealing with inflation then you’ll be ok. He’s just some bloke with a book trying to scare us into buying it (brb check it out at the library). if he took a % credit card out and stoozed it he wouldn’t have to write wooden books. That pic with the chancellors briefcase, i mean come on that chit is sick.

    A well diversified portfolio of schizz will do you well. If I was old I’d still be bad ass and go for something like Vanguard LifeStrategy 100% Equity GBP Accumulation and just go draw down. prrrrp!! to annuities.

    wine is for drinking, art is for looking at and property is for living or renting. Being wealthier than your lifestyle demands is the only tru way to retire. So get stoic!

    Lifestyling is for people with elasticated waistbands, comfy shoes and those matching his and her wolf fleeces that you can get in the daily mails sunday supplements. Who wants gilts???

    I grew up with chit, graduated with a lot less than chit but I work hard have saved a min of 50% of my salary since. My life will be exponential! I’m going to be FI before I really want to be. Life sucks!

    With my frugality skills I wouldn’t even worry if I ended up with chit again as I know I could end up with a huge cash stash within 5-10 years enough to retire all over again.

    With my moneymaking skills I wouldn’t even worry if I ended up with chit again as I know I could end up with a huge cash stash within 5-10 years enough to retire all over again.

    Did I say that twice. Must be two sides to every coin.

    Ermine, I read your blog, alot, too much. It’s time to stop ironing your underpants and live life! Your website excited me because you were a bit mustachian but then you ended up complaining grandad.

    As for ETF’s i don’t understand them so thank you monevator for the article. At the min I have 60% of my portfolio in vanguard so I’m probably doing ok for fees but it’s an area i’m looking at. Compared to my age group (mid 20’s) i’m boring and sensible. So at least i’m aware.

    If you really want to know. Work hard, Lift heavy, go for (9+/10 Sleep well and have the mindset of a 10k day CEO. DIsregard everything but success cos haters gonna hate and sloots gunna sloot. Oh and read, read, read and read and don’t tell nobody cos nobody is ever going to understand you the way you do, keep the succeess thing quiet, cos nobody likes those who brag.

    Being average – No thanks Jeff!

  • 3 dearieme August 11, 2013, 1:01 am

    More rodent than alpha, I’d say.

  • 4 dom August 11, 2013, 10:37 pm

    These headline low mortgage rates are surely going to drop through the floor pretty soon, with someone at the helm of BOE actually talking up the £/uk and assuring no rate rises for 3-4 years. Another log on the fire of the warming housing market? I think it’s going to get very messy when they pull the funding for lending.

    But what can you do? I’m taking the low fixes and overpaying as fast as I can, can you ever have too much equity?

  • 5 Moneywise August 12, 2013, 11:04 am

    A big thank you for the links below and for the article of course.

  • 6 The Investor August 13, 2013, 9:57 pm

    @ermine — I guess what alpharodent said, only much less confrontationally! 😉

    I currently have well over six months living expenses in cash in my emergency fund — because I’m a cautious fuddy-duddy at heart who just happens to usually be 90% in equities — and there’s more cash on hand in my business that I can extract on pain of tax. This emergency fund covers my 0% credit card bill balance by at least six-fold, and probably more. (I have never even done the maths I feel so comfortable with it).

    Being a single man with a landlord not a homeowner has some few perks. 😉 One is that the only real emergencies I can face are medical (very hard to judge when money would help) and loss of income. I don’t drive, and the landlord can deal with the boiler.

    So I am more than happy to add “have to pay off the 0% credit card bill from the emergency fund in very hard to envisage circumstances” to my small list of potential emergencies.

    Assuming no emergencies, a combination of post-expenses earnings, investment income, and passive income could clear the 0% balance within a month if needed, but of course it isn’t needed. Even now I’ve got until January to worry about it.

    If I move it onto the new card as I discussed above then we’re looking at another year and a quarter stoozed, for as I say a 1% charge.

    At that point you’re looking at almost 3 years of several thousand pounds worth of mainly grocery shopping and bills that was largely unavoidable payments that to that point will have cost me an average charge of about 0.3-0.5% per year to postpone paying for.

    If I am not confident that I can beat 0.5% per annum on average over the long-term with my investing, then I shouldn’t be writing an investment blog.

    I am very confident I can beat 0.5% per annum. Even after tax. 😉

    And all the time inflation has been whittling away at the credit card balance’s real terms value, so in three years it’ll be worth in real terms perhaps 10% less?

    Money illusion works both ways.

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