5 reasons why ETFs should be in your investment portfolio

22nd June 2010

It's a remarkable thought, but it's now been ten years since the very first exchange traded funds were listed on the London Stock Exchange.

In those dark days at the turn of the century, with a ferocious stock market crisis snapping at their heels, ETFs were thought of at the time as a quick and stripped-down way for seasoned investors to get round the dominance of expensive unit trusts and investment trusts.

It's rather doubtful how many people ever expected them to catch on with the wider investing public.

But here we are in 2010, with more than 850 ETFs listed by the LSE, and with an expected worldwide asset base of maybe a trillion dollars.

An army of private investors

14 thoughts on “5 reasons why ETFs should be in your investment portfolio”

  1. Anonymous says:

    Well written Shaun. Absolutely correct on the scandal of failed bankers getting huge sums from the taxpayer and shareholders.

    Why should failing bankers collect millions when benefit fraudsters get prosecuted ?

    I suggest separating retail banking from investment

    Set up a simple affordable bank
    guarantee scheme that only permits basic retail banking services – well scrutinised loans on books from
    deposits and safe funding. A well regulated system can protect savers
    in retail banks and building societies. Do not allow retail banks to loan to or invest money in investment banks.

    Allow the investment banks to continue
    without interference and without government guarantee. As a
    capitalist business you are free to do business, if you bankrupt do
    not ask for a bailout, do not pass go, do not collect your bonus or
    golden handshake. Light touch regulation to prevent fraud and insider
    trading. If investment banks want a guarantee, then let them arrange
    and pay for their own scheme.

    Pigs will fly before this plan does, it
    steps on vested interests. Investment bankers like the heads I win,
    tails the taxpayer loses scheme too much. It is government guaranteed gambling.

    1. James says:

      When assessing the likelihood of any real reform, you might care to look at the CVs of those with a position of influence in these matters. Step forward the last head of the FSA, Callum Mccarthy (ex-Kleinwort Benson) and the current incumbent, Hector Sants (ex-CSFB). Do you think that this pair is really going to help here? I met Sants recently and he told me that he had changed his contract at the FSA so that he has no notice period and can leave at any time to go back to “earning real money”. In other words, the chief regulator does not exactly have his eye on cutting city fees.
      On the other hand, the one authority which did recommend a split of the banks, at least in balance sheet terms, was headed by John Vickers. He is of course independent, as he has lifetime tenure as warden of All Souls in Oxford.

  2. Anonymous says:

    Hi Shaun
    Re : banking – if securitisation markets remain closed or anaemic the banks still have bloated balance sheets containing historical loans they havent originated which must be funded in an edgy wholesale funding market ; as you have said SLS is being wound down – without a QE engine room to backstop, where does this end up? Surely, the hope was that growth would backfill the problem – back to credit and SMEs.

    1. Anonymous says:

      Yes we are back to the “kicking the can down the road strategy” again where things were delayed in the hope that economic growth would ameliorate or end the problems we face. To my mind this always looked flawed but as we progress it is the length of the problems as much as their severity which has foiled this theory.

      Also I think that the deepest flaw of all in the theory was that politicians would stick to what is required whereas in reality their growth projections have moved from fantasy to utter fantasy… This leads to more disappointment as time passes. Greece has been an example of this where I was writing a year ago that she would get a deep and severe recession from her austerity plan but so many others lived in a world where somehow the drop in GDP might only be a few %.

      Moving back to the UK I feel that we are re-running some of the concepts of the 1980s when as I explained to Graeme b a while back we ran a policy of over-funding. For younger or newer readers this was in effect an anti-QE or perhaps the doppelganger of it. Anyway the word disintermediation popped up where money appeared where it should not according to the theory ( there was a mathematical formula for broad money which was called £m3 then which in theory explained what would happen). So now we have its opposite it is not a surprise to me that we have anti-disintermediation where money is not where it should be but I am surprised that so many economists ignored this likelihood.

  3. Drf says:

    “As a re-start of QE means that the previous efforts have been a failure why can we reasonably expect that a new effort will work? Continuing the musical theme will the economy and financial markets quote the theme from CSI? “Wont get fooled again?” by the Who.”

    Well of course, a quotation attributed to Albert Einstein (although disputed by some) is that the definition of insanity is `doing the same thing over and over again and expecting different results’. That would imply that Western Nations are presently being led by economists and others who are insane!

    “The fundamental problem with this cycle is that it is in danger of becoming self-fulfiling as the need for QE3 implies that there will be a need for QE4 and QE5 and so on….. So it implies that there may be no exit strategy at all.” That is exactly what always occurs when politicians use yet more debasement to fund their profligacy; it becomes an inescapable habit like a drug. It is such an easy way to get public money to spend; because it becomes addictive they then eventually cannot stop, and the dose needed becomes larger and larger. This then becomes the Weimar syndrome, and finally they destroy everything by their incompetence and stupidity!

  4. Mr_Kowalski555 says:

    UH OH.. Greece threatens to leave Eurozone. Sure hope nobody’s long the Euro this weekend. What have you hears Shaun ?


    1. Anonymous says:

      Hi Mr.K
      You catch me mulling over this matter. It reminds me in some ways of the time I spent in the City when Friday afternoon after Friday afternoon the UK was going to join the Exchange Rate Mechanism or ERM which was a forerunner of the Euro. This went on and on and finally happened when I was working in Tokyo so I missed it…
      So Friday afternoons are a good time for a rumour and this has the back-up that frankly it is not such a silly idea is it? Although as I pointed out in my article of the 18th of April were anyone to default it would seem logical for Ireland to do so.
      So it doesnt seem that likely and to back it up the usually reliable Kathimerini has just published this online.

      “The report about Greece leaving the eurozone is untrue,” Deputy Finance
      Minister Filippos Sachinidis told Reuters minutes after the Spiegel report
      appeared on the Internet. “Such reports undermine Greece and the euro and serve
      market speculation games.”

      A few minutes later, the Finance Ministry issued a formal rejection of the
      claims. “Apart from being untrue, the report about Greece’s possible exit from
      the eurozone has been written with an inconceivable lack of seriousness even
      though the Greek government and other EU member states have repeatedly denied
      such a case.””

      But whilst things are as they are who can absolutely say no? So the percentage play is to expect to see this quite a few more times and then hope not to see a black swan this weekend…

      1. r mcgrath says:

        Would someone out there please explain to me why it would be a bad thing for Greece either to leave the Euro zone, or even be asked to leave. This would, of course, apply to any country whose economy failed to measure up to Euro zone standards.

    2. Anonymous says:

      Perhaps there was some sort of meeting and it was about Ireland….

      “Ireland is to get an interest rate cut on the emergency loans it has acquired from EU bodies, the BBC has learned.”

  5. Mac says:

    Correct me where I am going wrong here but it looks like the
    UK banking sector has a charmed existence by implicit political guarantee. They hold a list of assets which if released
    onto the ‘open market’ would make them insolvent so our government has
    indemnified them against those possible losses.
    To further insulate them we have interest rates at zero for all intent
    and purposes which Merve says is to allow the financially overstretched some
    semblance of disposable income in a consumer orientated service sector economy
    and keep up the illusion of realistic housing costings. It also allows banks to take our deposits and
    offer little or no return whilst the banks can profit from a series of no loose
    bets at various governmental casinos. After using government money to bolster
    balance sheets the banks then are asked to purchase government securities which
    again maintains another illusion, this time our AAA rating.

    If that parasitic relationship is about correct does anyone
    really think systemic banking reform could ever be on the agenda?

  6. Anonymous says:

    Hi Shaun again – banking
    The Auditor General’s December 2010 report contains a useful summary of the current state of play. Its conclusions are of concern. It confirms that in relation to HMG supported bank debt funding, The Credit Guarantee Scheme is now closed with £115bn expiring in 2012 but allowing £83bn capable of being rolled over to 2014. The SLS funding scheme for £110bn is to be closed January 2012. BoE estimate that £480bn of unsupported bank funding will mature or be called by end of 2012.Rates of new issuance, they say, would not be sufficient to refinance these debts without increasing deposits, asset sales or restructuring.The BoE says that the uk banks’ aggregate funding plans make optimistic assumptions on system-wide deposit growth and envisage REDUCTIONS IN LENDING. Interbank lending rates / wholesale funding costs are increasing in reference to base rate.

    Back to your argument that base rates should be increased – what will this mean to banks’ ability to refinance and their market funding costs. If reductions in SME credit lending is part of the existing strategy to aid bank refinancing in a weak growth environment, what would you suggest is done now? All of this assumes no further big shocks, presumably.

  7. Anonymous says:

    The U.K. Will Need a Bailout Soon

    Says Jim Rogers

    :They [the government] are not doing it [cutting spending
    enough]. They are saying they are doing it but they are not. They are
    saving £1 billion ($1.6 billion) here or there but they are not doing
    what they really need to and I’m not sure the government would survive
    the kind of pain that is really required.

    How can the UK ever repay the debt that is continually rising? The UK
    will need a bailout soon. You have the advantage that your debt is
    longer term but let’s assume the government keep to these austerity
    plans or really put them in place people will start to complain.

    The government will begin to lose by-elections and the government could fall, then what?


    1. Anonymous says:

      Hi Yulva
      I think that Jim Rogers makes some good points but that CNBC over-egg it with their title as he says “may need a bailout ” which becomes “will need a bailout”…

  8. Anonymous says:

    Before we leave banks, and thank you for your comment – I would like to support other remarks by contributors and mention the House of Lords Economic Affairs Committee’s recent findings on bank auditing – it leaves the reader wondering whether financial statements produced a true and fair view. Aside from worrying findings that IFRS led to a failure to recognise expected losses and mark to model processes of valuation of bank assets using generated financial modelling for complex financial assets, it makes the following finding ; ” 140. There is a particular—and particularly serious—problem with the auditing of banks which has to be faced. An auditor who encounters a problem which might, in the ordinary course of
    events, justify a published qualification to the accounts, might understandably be reluctant to insist on this in the case of a bank. They might fear that to do so could cause a collapse of confidence and a run on the bank, to the detriment of the shareholders and, quite possibly, of the wider public interest. While this problem cannot be entirely avoided, we recommend in paragraphs 164, 165 and 167 how it can best be minimised.”

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