The Ethical Investor's Handbook by Morten Strange

Author:Morten Strange
Language: eng
Format: epub
Publisher: Marshall Cavendish International

Ethical funds

Maybe picking stocks individually is too much for you. It is time-consuming; first you have to study how to do it, then you have to do the fundamental analysis of multiple companies, and then you have to keep a constant eye on your holdings and tweak your portfolio regularly as economic conditions change. There is also an element of risk. If you get it wrong you might lose all your capital.

Enter the fund manager; he will do all this for you – for a fee. Mutual funds are actively managed and consist of a basket of assets selected and controlled by a capital management firm and its team of analysts and traders. ETFs – exchange-traded funds – are considered passive management; this type of fund will mimic and track an underlying group of assets such as a stock index; therefore ETFs are cheaper for the management company to handle and fees are lower.

It is important that you check the bid/offer spread that the fund offers; for mutual funds it can be as high as 2%. That means that should you buy into a fund and sell again the next day, you will have lost 4% of your capital right there! For ETFs the spread can be much smaller, as low as 0.05% for some products. I will not make any specific recommendations here; each service provider will announce their own terms and conditions and you will just have to find the product that is right for you. While you are at it, also check the so-called expense ratio, i.e. total yearly expenses over equity. It could be as high as 1.5% p.a. for some actively managed mutual funds; this is the amount that will come out of any dividends or capital gains you might make from the fund. Also make sure you check the expected yield, i.e. the yearly dividends from holdings that the fund will pass on to investors over the current price. Past yields are no guarantee of future performance, of course, but they will give you some idea of what to expect.

ETFs are not only cheaper to buy and sell and hold, they are also more liquid. As their implies, ETFs are traded on a stock exchange, and as such you can buy and sell at any time of the day while the exchange is open for business. In contrast, the price of a mutual fund is calculated at the end of each day using the NAV – net asset value – over number of units in the fund, and that is the price you will pay when you buy it the next day, usually through a bank or another financial institution. So with ETFs being so cheap and easy to trade, passive management is obviously the growing trend among investors and capital management companies at the moment. I find this ETF tracker useful: etfdb.com. The information you get is astonishing, and you can spend hours just researching all the wonderful possibilities there for putting you money to work.

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