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Indexing Just Got Cheaper

Lyxor enters the London ETF market.

Emiko Kurotsu 18 May, 2007 | 2:25PM
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UK investors have just increased their indexing options with the launch of Lyxor Asset Management’s three new ETFs (exchange-traded funds) on the London Stock Exchange: Lyxor ETF FTSE All Share, Lyxor ETF FTSE 100, and Lyxor ETF FTSE 250. Their move into the London ETF market brings welcome competition to a useful but all too often ignored asset class.

All About ETFs
 ETFs are baskets of individual securities that, unlike OEICs or unit trusts, are traded and priced throughout the day on an exchange. They almost always replicate an index (there has been persistent talk of actively managed ETFs, though none have appeared as yet), but many charge less for their services than regular index funds do. Because the fund

s don’t have to service individual investors accounts (your account is with your brokerage), they can avoid many of the costs regular funds are saddled with. Investors pay just a brokerage commission for the trade and often incur a fraction of the total expense ratio (TER) that retail OEICs or unit trusts charge. The average TER for developed market equity ETFs, for instance, was just 0.38% while emerging market equity ETFs carried a TER of just 0.74% per annum as of December 2006.

ETFs can also be a good choice for investors with small sums to put to work: You can buy as little as a single share, which can be as low as £6+ commission. That’s much cheaper than the usual minimum investments for OEICs and unit trusts, which typically run upwards of £1000. That said, small investors should still exercise care: Depending on your broker, the cost of commissions on such small investments may loom too large to make the purchase economically viable. It’s also worth keeping in mind that ETFs trade at a market price rather than the portfolio’s net asset value (NAV). Although they typically track their NAV’s well, the potential exists for their market prices to deviate from NAV and impact returns. (Read more about the pros and cons of ETFs.)

More Competition a Boon
 The Lyxor launch may be a harbinger of things to come. Until now, Barclay’s iShares were the only ETFs available on the London market due in part to an irksome stamp duty rule that created a major disincentive for overseas fund companies to list here. Since the withdrawal of this rule in February 2007 (as we predicted in our fund commentary here), the playing field has opened up. Lyxor has taken advantage of this with the launch of the three new ETFs. The TERs of the new offerings are 0.3% (FTSE 100), 0.35% (FTSE 250), and 0.4% (FSTE All Share) per annum. That gives existing tracker funds and ETFs strong competition: the Lyxor FTSE 100 and FTSE 250 are now the cheapest available offerings for exposure to these indexes (the iShares FTSE 100 and iShares FTSE 250 ETFs charge 0.4% per annum while the lowest-priced FTSE 100 unit trust carries a TER of 0.41%). Even so, the Lyxor FTSE All-Share ETF (the only ETF that tracks this index), is still not the cheapest All-Share offering around. The Fidelity Moneybuilder UK Index fund can be had for an even cheaper 0.3% TER (as we note in our qualitative fund analysis of this offering.)

When it comes to indexing, costs are paramount and we’re glad to see increased competition leading to lower costs. Investors looking for dirt-cheap UK index exposure would do well to consider these ETFs options.

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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About Author

Emiko Kurotsu  Emiko Kurotsu is an exchange-traded fund analyst with Morningstar.

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