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The Footsie is dead, long live ETFs

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OK, excuse the clickbait headline, the FTSE 100 is far from dead although it can often be pretty boring for passive investors who like a little more excitement in their lives.

Returns from Wall Street’s main indices have been a lot more exciting in the past couple of years, especially the Nasdaq.

The City of London, I am probably not alone in thinking, needs its own exciting tech index – the Britdaq, Chips 500 or maybe the Brexdaq to commemorate the split from our continental neighbours. 

READ: The FTSE 100 is boring, full of dead wood and maybe even pointless

Not only that, there are fundamental investment reasons to focus investment on British stocks as so many of them look cheap even after the vaccine boost this month.

For investors who want to bet on the UK, but want something a bit more dynamic than the Footsie without the resource companies and the big banks, there is the FTSE 250 or an ETF based on this.

Examples are the Amundi Prime UK Mid and Small Cap UCITS ETF.

“This ETF gives you a greater exposure to the smaller, faster growing sectors in the UK without the deadwood of the FTSE 100 or the financial investment trusts,” recommends ETF expert Peter Sleep at Seven Investment Management. 

Industrial companies make up 25% of the Amundi ETF, 2.5 times the weighting of the FTSE 100, with exposure to boring resource and big bank stocks greatly reduced from nearly 40% down to less than 10%. This ETF costs 0.05%. 

“A bargain,” as Sleep says.

FTSE 250 trackers include the HSBC FTSE 250 Ucits ETF (LON:HMCX), charging an ongoing 0.28%, and the Vanguard FTSE 250 ETF (LON:VMID), with just a 0.1% charge – though both include the investment funds that the Amundi leaves out.

But one other key thing the UK is missing, and which makes up a colossal amount of the value of the US indices, is big tech.

While the FTSE 100 has Ocado (LON:OSDO), Just Eat (LON:JET) and Avast (LON:AVST), these are a tiny proportion of the full index.

As a result, there are barely any UK focused funds due to the lack of UK listed companies of sufficient size in these fields.

The only real UK option is to follow the FTSE techMARK Focus, though this is composed of 26 holdings, but investors can track this with the Close FTSE techMARK Fund.

However, this fund has just £37.77m assets under management and is regarded as highly risky, in part due to its small, concentrated number of holdings, says Tom Bailey, ETFs specialist at interactive investor.

It is also not fully-passive, with at least 80% of the fund’s assets invested in the index while the remainder, the fund documents explain, “may be invested in shares of companies which in the manager’s opinion are expected to become part of the index”.

For those keen on the wider tech angle, there are a wide range of sector ETFs, with thematic ETF investing a big trend this year.

This allows investors to zero in on specific themes like electric vehicles, innovative healthcare, robotics, cannabis, space.

READ: How to invest in space stocks with ETFs

For tech thematic ETFs, you need to look outside the UK, with the companies mostly from the US and Asia.

“Even though they are passive, costs for thematic ETFs are a higher than a major index tracker as their genesis is with an industry expert identifying companies for the index and there’s higher costs but these can be a really good way of getting an exciting active idea at a lower cost,” says AJ Bell’s self-proclaimed “ETF guy” Matt Brennan.

Examples are the iShares Healthcare Innovation (LON:DRDR) or iShares Automation & Robotics (LON:RBTX), which cost 0.4% per year, or the EMQQ Emerging Markets Internet & Ecommerce ETF (LON:EMQP), HAN-GINS Cloud Technology ETF (LON:SKYY), HAN-GINS Innovative Technologies ETF (LON:ITEK), Digital Infrastructure and Connectivity UCITS ETF (LON:DIGI), the L&G Pharma Breakthrough UCITS ETF (LON:BIOT) and iShares Ageing Population ETF (LON:AGED).

Overseas-listed curios include the Procure Space ETF (NASDAQ:UFO), the VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO) and the Xtrackers Future Mobility UCITS ETF (FRA:XMOV).

While these do not have quite the rock-bottom fees of a Footsie tracker, but they are still significantly less than some of the active funds to get access to cybersecurity or robotics, where you’ll be paying 1% to 2%.

The EMQQ Emerging Markets Internet and Ecommerce ETF, which offers access to many leading companies driving the growth of online consumption in the developing world, including companies involved in search engines, online retailers, social networks, online video, online gaming, e-payment systems and online travel, has been one of the best performing ETFs this year. It costs 0.86% which in part reflects the higher cost of buying stocks in places like China.

For those who want who think some of the tech ETFs are too high octane, Sleep has another suggestion.

“I don’t think you need high volatility or explosive growth to do well in markets, ex deadwood. We own in our portfolios the Xtrackers MSCI USA Health Care DR UCITS ETF, which only costs 0.12%. 

“The world is getting older and the demand for healthcare is on the increase.  Medical companies are continually coming up with new treatments, particularly in fields like oncology and hopefully vaccines.  The healthcare companies also have terrific records in delivering great returns with low volatility to their shareholders. They do this, but the shares of these companies are bit overlooked at the moment, and they are looking cheap.”

For investment experts who believe strongly enough the UK needs its own Nasdaq or see a gap in the thematic market, one solution is to launch your own ETF.

With HANetf, which has so far launched five ETFs this year alone and 11 in less than three years, including the EMQQ and HAN-GINs pair mentioned above, this is not as impossible as it sounds.

READ: Why the ‘delicatessen approach’ to exchange-traded funds is the way forward

HANetf has been pulling up trees in the industry and has built up almost £700mln of assets under management in double-quick time as it hurtles towards its ultimate aim of running 150 to 200 products.

Co-founder Hector McNeil says if you can contribute £30k for the market and your ETF proposal conforms to the Ucits regulations, HANetf has the ability to set up a new ETF in less than 10 weeks.

“That’s what great about our model – we’re just crushing the barriers to entry. Everybody’s worried that they’ll get squashed by the big guys like iShares but as we’ve shown if you’ve got a good idea it’ll work.

“We’ll listen to any ideas although we won’t put a shit fund on our platform,” the no-nonsense McNeil says.

With HANetf having fielded around 700 enquiries since it founded less than three years ago, and with several in the wings preparing for launch, there’s a good chance that if there’s no perfect ETF on the market for you now, if you wait a short while one or two will come along soon.

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