Analysts Demystify Passive Investing

Morningstar's ETF team have made clear the European ETF market - providing education, investment ideas and analysis on the top 10 passive providers in one handy report

Emma Wall 26 November, 2014 | 10:18AM
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Emma Wall: Hello and welcome to the Morningstar series 'Ask the Expert'. I'm Emma Wall and here with me today is Morningstar analyst, Kenneth Lamont.

Kenneth Lamont: Hello Emma.

Wall: Hello Kenneth. So you and the rest of your passive analyst colleagues have produced this extremely interesting and wide ranging report into the passives market in Europe, for our readers. To sort of give them a real overview of everything that’s going on at the moment. And one of the things you really looked at was due diligence, wasn’t it, perhaps you could tell us a bit about that.

Lamont: Well, first of all I'd like to say we are very pleased with the report. We put a lot of effort into it and I think it really adds value, it really brings something new to the table for investors looking at ETFs for the first time, but also industry specialists who have worked in the industry for some time. But probably the key, probably the most interesting section of the report is the due diligence we did into each of the 10 largest ETF providers in Europe. It's broken down into sections focusing on each specific provider individually and effectively we sent out questionnaires and then went to visit each provider in person and sat with each of the key stakeholders involved in the process to fully understand how the money gets managed.

Wall: So people who are familiar with the way our analysts work in this building will know the five P process. I suppose if you were going to liken it to one of them, this is really looking at the parent, peers and it is really getting to know the company behind, the provider behind all those ETFs.

Lamont: Well, provider and process with ETFs are intertwined, but yes I think, looking at the parent company is extremely important and to sit down and to understand the risk processes that are involved.

Wall: One of the other things you are looking at. You mentioned there that the great thing about this report is it, it really does have something for everybody. People who are really familiar with investing in ETFs and also people who are coming to passives for the first time and really perhaps want a breakdown of what exactly investing in passive funds entails and for them we have an education section to this report, don’t we?

Lamont: There certainly is, there is a guide to ETFs for those perhaps as you say coming to ETFs for the first time. It can be perhaps slightly daunting, it's a new product, for investors to grapple with. So we provided something, sort of an outline of the major concepts and ideas surrounding ETFs.

Wall: And where exactly are people putting their money at the moment.

Lamont: Well at the moment if you look at the last year. The most popular segment I think by considerable margin is the U.S. large-cap equity market.

Wall: And if you were looking to buy an ETF tracking the S&P 500 a year ago you perhaps were looking a little bit overvalued, but in the last six months we've had a correction of 10%. So again it looks a bit attractive. Perhaps you could outline a couple of ETFs that give exposure to that market.

Lamont: Well there are certainly two ETFs that have stood out in terms of interest from investors and in flows this year and the two of them can be separated primarily between one that distributes and one that accumulates. So investors must choose between which of these funds they would be interested in, the one is the Vanguard S&P 500 Fund, which distributes and charges a TR of only 7 basis points. The iShares S&P 500 Fund also charges 7 basis points, but it’s an accumulating fund.

Wall: So it's really choosing between growth and income.

Lamont: It is indeed, yes.

Wall: Kenneth, thank you very much.

Lamont: Thank you very much Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
iShares Core S&P 500 ETF USD Acc GBP42,805.00 GBX-1.32Rating
Vanguard S&P 500 UCITS ETF95.89 USD-1.55Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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