In past articles, we talked in details about what is ETF and how to invest in it. This tool smooths out the risks of investing in individual assets, minimizes risk through diversification, saves time trader by investing in different directions, estimated by fund staff.
For investors of the CIS countries, investments in ETFs is problematic for several reasons:
in Russia, the funds are virtually absent, there is no practice of investment;
investments in the funds on the US exchanges are limited to issues of minimum deposit (from 30 thousand US dollars), taxation and other organizational issues.
There is a solution — a mutual funds and ETFs allow you to invest small amounts without access to foreign markets. The investor investing in domestic mutual Funds, which themselves go on exchange in the USA and Europe. It may seem that once the mediator is an unnecessary commission costs. This is partly true, but for most investor to go directly to the ETF will be even harder. Mutual Fund and ETF is a conservative investment with a medium level of income and minimum risk.
Mutual Fund and ETF: types of funds, investment policy and risk mitigation
Exchange funds ETFs cover virtually all areas and sectors of the global economy. There are target and diversified. In Russia there are about 60 mutual Funds that invest in foreign assets. They can be divided into several groups:
funds of funds. Mutual funds that invest in ETF;
stock funds. Invest money in foreign securities, the portfolio can include domestic securities;
bond funds. Investing in foreign debt obligations;
mixed funds. Working with multiple assets.
Rules for the selection of mutual funds and ETF:
The choice of an asset
The investor should perform minimal analysis of the foreign markets. Domestic mutual funds work with the following groups of foreign assets:
shares of companies of a single country (investing in the economy of a developed or developing country are two different strategies);
shares of companies of developing or developed countries groups (in the first case bet on a certain country, for example, the growth of the Brazilian economy after the Olympics. In this case, the rate, for example, in developing countries whose economy will go to growth, together with rising of oil prices);
bonds of developed or developing countries (separately we can talk about corporate bonds or government);
gold, precious metals;
global real estate.
The choice of ETFs
The same asset class can be the target of different ETFs. For example, there are funds with hedging risk, and without it. The assets of the funds, which appear to be similar, they are not.
Tip: for promotional purposes, managing companies give their mutual Funds in tune with the title, e.g. “Global debt market”, but in fact an asset of the ETF are working with in the bonds of developing countries. ETF cannot be called global, and hence the PIF also does not cover the global debt market.
You may get to know in which mutual fund (or rather, to what ETF) on the website of the management company. But often management companies spread information not about the ETF but about the asset percentage. You will not be able to check out these figures, and to trust the Russian management companies — a great luxury. Alternative: you need to clarify the specific names of the funds. Mutual funds and ETFs need to disclose this information to investors. Knowing the name of the ETF, on the US sites you will be able to find the structure of its investment. However, you will need knowledge of English language.
The Commissions of mutual fund and ETF
Commissions can be divided into three main types:
- commission of the management company;
- commission for services of Depositary, auditor and appraiser;
- other expenses.
The amount of fee is specified at the time of signing the agreement between the investor and the management company. The contract specifies the maximum commission that may in fact be lower. Depending on the terms of purchase of a share the discounts can be offered. We should also look to the commission of ETF. The total amount of commissions of different management companies may differ in 1.5-2 times.
The ETF structure
Mutual funds and ETFs have a completely different structure. First, most ETFs diversificate your portfolio. There are specialized ETFs, but in most cases, near the stocks in the portfolio can be metals and bonds. So the structure of mutual funds and ETFs is assessed in the complex.
Dynamics of mutual funds and ETFs
The investment needs to follow the yield of the ETF, or at least repeat the direction. The exchange rate plays a big role. For example, one of the funds increased by 30% last year, while ETFs grew by 3%. The reason — the strengthening of the ruble.
Also pay attention to the value of the net assets of the management company. The following is a list of some of the mutual Funds working with ETF, but the information about the commissions may be outdated.
The benefits of investing in ETFs through mutual funds:
- the minimum deposit is 1000-15000 rubles;
- taxation issues are managed by the management company;
- English is almost never needed (except for independent analysis of foreign ETF);
- there are tax incentives (tax refund deduction).
Disadvantages of investing in ETFs through mutual funds:
- fees are higher because of the additional mediation;
- effect on the yield of the national currency;
- the total number of ETFs in the world — more than 3000, through mutual funds only 30-40 ETFs are available;
- risks of the reliability of the managing company (trust to ETF is higher).
We recommend to hedge currency risk by investing in mutual funds working with ETF and mutual funds investing in securities of domestic issuers. Please note that the US stock market is now almost at its maximum, the oil is not showing growth. This means that foreign ETF in early 2017 can go in the negative, the weakening of the ruble due to weak oil will increase the loss. The yield of mutual funds operating with the Russian issuers made 10-30% in 2016 with the prospect of growth in 2017.