WEBVTT 1 00:00:05.960 --> 00:00:08.840 Hello, I'm Clare and welcome to Smart Investor... 2 00:00:08.880 --> 00:00:12.360 the show that can help you get the most from your investments. 3 00:00:12.400 --> 00:00:15.120 Please be aware that although we can't offer personal advice... 5 00:00:18.920 --> 00:00:20.840 to make you a smarter investor. 6 00:00:20.880 --> 00:00:23.920 Funds are a good option for many people looking to invest... 7 00:00:23.960 --> 00:00:27.000 because your money is pooled with that of other investors... 8 00:00:27.040 --> 00:00:29.800 and then used to invest in a range of different assets... 9 00:00:29.840 --> 00:00:31.760 often shares or bonds. 10 00:00:31.800 --> 00:00:35.800 This gives greater diversification than if you were to invest yourself... 11 00:00:35.840 --> 00:00:38.720 in the shares or bonds of individual companies... 12 00:00:38.760 --> 00:00:41.360 and it can help reduce the risk you're taking. 13 00:00:41.400 --> 00:00:44.000 However, there are different types of funds. 14 00:00:44.040 --> 00:00:47.160 Some are actively managed, which means a fund manager will choose... 15 00:00:47.200 --> 00:00:49.520 what to invest in and when to buy and sell. 16 00:00:49.560 --> 00:00:51.560 Others are passively managed... 17 00:00:51.600 --> 00:00:55.160 which means they mirror a stock market index or basket of assets... 18 00:00:55.200 --> 00:00:58.880 and the performance follows that of the index they're tracking. 19 00:00:58.920 --> 00:01:02.640 Today we're looking at Exchange Traded Funds - ETFs... 20 00:01:02.680 --> 00:01:04.880 which are a type of passive investment. 21 00:01:04.920 --> 00:01:08.440 I'm joined by Joe Parkin from BlackRock, the investment firm. 22 00:01:08.480 --> 00:01:10.040 Joe, thanks for joining us. 23 00:01:10.080 --> 00:01:12.480 Can you explain what an ETF is? 24 00:01:12.520 --> 00:01:15.240 Yeah, sure. An ETF, or Exchange Traded Fund... 25 00:01:15.280 --> 00:01:18.680 is a simple and easy way to get access to investment markets. 26 00:01:18.720 --> 00:01:22.240 It is a pre-defined basket of bonds, stocks or commodities... 27 00:01:22.280 --> 00:01:25.680 that we wrap into a fund and then we list onto the exchange... 28 00:01:25.720 --> 00:01:27.240 so that everyone can use it. 29 00:01:27.280 --> 00:01:30.800 It's a very, very effective way of getting access to a large number... 30 00:01:30.840 --> 00:01:34.240 of stocks, bonds or commodities in one simple transaction. 31 00:01:34.280 --> 00:01:36.960 They're also pretty new. 32 00:01:36.000 --> 00:01:40.400 They were created in 2001 and are part of the modern way of investing. 33 00:01:40.440 --> 00:01:43.640 What they do is, they allow all investors of all types... 34 00:01:43.680 --> 00:01:46.160 the ability to invest in global markets... 35 00:01:46.200 --> 00:01:50.120 without having to do huge amounts of analysis on individual stocks... 36 00:01:50.160 --> 00:01:53.160 bonds, funds, or potentially go through an advisor. 37 00:01:53.200 --> 00:01:55.200 So there's a large choice. 38 00:01:55.240 --> 00:01:58.200 What can people invest in via an ETF? 39 00:01:58.880 --> 00:02:02.160 ETFs have certainly democratised the way people invest. 40 00:02:02.200 --> 00:02:06.080 It's also given them the ability to invest in countries, regions... 41 00:02:06.120 --> 00:02:06.320 themes, sectors and all asset classes with one simple transaction. 42 00:02:12.480 --> 00:02:15.760 I think the key to point out is, because it's a passive fund... 43 00:02:15.800 --> 00:02:19.400 it will only ever track and it will never beat the.... 44 00:02:19.440 --> 00:02:23.880 The benchmark is definitely at the core of every single ETF. 45 00:02:23.920 --> 00:02:25.920 This benchmark is pre-defined. 46 00:02:25.960 --> 00:02:28.760 Then what we do is, we then go and track that index. 47 00:02:28.800 --> 00:02:31.280 What you'll get is the performance of the index... 48 00:02:31.320 --> 00:02:33.720 minus the cost of us running the portfolio. 49 00:02:33.760 --> 00:02:37.840 This differs to an active manager who always tries to beat the benchmark... 50 00:02:37.880 --> 00:02:39.280 over a period of time... 51 00:02:39.320 --> 00:02:41.560 but typically charges higher costs in order to do that. 52 00:02:41.600 --> 00:02:44.120 What role can they play in an individual's portfolio? 53 00:02:44.160 --> 00:02:47.280 ETFs can play many roles in an individual's portfolio. 54 00:02:47.320 --> 00:02:49.520 One of the things to realise first up... 55 00:02:49.560 --> 00:02:53.920 is that ETFs and active funds can co-exist in the same portfolio. 56 00:02:53.960 --> 00:02:56.840 I think actually they work very well in the same portfolio 57 00:02:56.880 --> 00:02:59.320 and can complement themselves to build better portfolios. 58 00:02:59.360 --> 00:03:02.440 In terms of the ETF there are three key areas... 59 00:03:02.480 --> 00:03:05.160 we see individuals using them in their portfolios. 60 00:03:05.200 --> 00:03:07.200 The first is a core holding. 61 00:03:07.240 --> 00:03:11.560 At a relatively low cost, you can get access to global equity or bond markets. 62 00:03:11.600 --> 00:03:13.920 Secondly, they can be used tactically... 63 00:03:13.960 --> 00:03:17.440 to take advantage of a market event or a political situation. 64 00:03:17.480 --> 00:03:21.200 And finally, they can be used to diversify your portfolio. 65 00:03:21.240 --> 00:03:24.160 Typically, active fund managers are concentrated... 66 00:03:24.200 --> 00:03:26.080 within their own market or sector. 67 00:03:26.120 --> 00:03:30.080 An ETF provides diversification to that active manager... 68 00:03:30.120 --> 00:03:32.360 and helps you to build a better portfolio. 69 00:03:32.400 --> 00:03:35.520 So regardless of the investor and their experience... 70 00:03:35.560 --> 00:03:39.320 an ETF, if somebody is looking to invest, is something worth considering? 71 00:03:39.360 --> 00:03:42.080 Most definitely. ETFs are just another tool... 72 00:03:42.120 --> 00:03:44.720 investors use to build better portfolios... 73 00:03:44.760 --> 00:03:47.640 in the same way they use equities, bonds and funds. 74 00:03:47.680 --> 00:03:50.000 Great. Thank you very much for that, Joe. 75 00:03:50.040 --> 00:03:54.680 If you'd like more information about ETFs or other types of funds... 76 00:03:54.720 --> 00:03:56.520 please visit our website. 77 00:03:56.560 --> 00:03:58.840 Thanks for watching and we'll see you next time.