I found 3 index funds - should i go for them or whats bad/good about them?

[Spe]

Hi. I live in a small country with fewer index investing opportunities than in the US (Norway).
That means that Vanguard is too expensive to buy here because of selling and buying costs to the broker.

However I recently identified these 3 index funds that are available to me without selling or buying costs:

1.) iShares MSCI World UCITS ETF (Acc) http://www.ishares.com/uk/individual/en/products/251882/ishares-msci-world-ucits-etf-acc-fund?siteEntryPassthrough=true

2.) Euro Stoxx 50 UCITS ETF (DR) http://funds.ft.com/uk/Tearsheet/Summary?s=DBXE:GER:EUR

3.) iShares Core S&P 500 UCITS ETF http://www.ishares.com/uk/individual/en/products/253743/ishares-sp-500-b-ucits-etf-acc-fund

The first one has a annual fee of 0,2%, the 2nd one has a fee of 0,09% and the 3rd has a fee of 0,07%.
How much should in percent should I buy of each of these securities? The most diversified fund is the most expensive, but is it worth it? Do you see any hidden costs or risk in these funds?

Thanks for help

[kvaruni]

iShares is definitely a household name in Europe for index trackers, and I would have no hesitation recommending them to you. For (1), an alternative might be Fidelity Index World Fund I (GB00B7LWFW05) which is denoted in GBP, but I doubt you will find any world index tracker any cheaper. This brings me to one possible concern: you will be exposed to currency risk. I'm not even sure you will be able to find an index tracker in krone but it might be worthwhile to have a look. I'm not exactly sure, but I thought the krone was linked to EUR? In that case, buying in EUR makes a lot of sense (have a look for DE000A1JS9A4). Also have a look at http://monevator.com/low-cost-index-trackers/ which lists some of the cheaper index trackers (but mostly focused on GBP).

As for your asset allocation ... this really depends on your desires and risk tolerance. For example, (1) probably has the best balance of risk/reward. I don't particularly like either (2) or (3) on their own because of the home-bias (EURO zone or US). You might be cheaper off mimicking (1) with a portfolio of your own and using trackers like (2) and (3), but it really just depends on what you want your asset allocation to look like. Do you want exposure to Asia? Those trackers tend to be more expensive, so decide first on how much exposure to Asia you want and crunch the numbers. You only want exposure to US/Europe? Sure, go ahead and buy (2) and (3) and forget about (1). Percentage-wise, I prefer to use market cap as a guideline. If you want to stick to (2) and (3), that would be 80% in (2) and 20% in (3). Note that with this allocation you only cover the EURO zone, not the UK nor non-EUR countries in Europe.

[Spe]

Thats a good advice. Perhaps I will buy the 2 cheapest options covering USA and the Eurozone and then I know another fund (this one: https://www.nordnet.no/mux/web/fonder/fondfakta.html?classid=F00000MKDH&ppm=0&nobuy=1&nm=KLP+AksjeFremvoksende+Markeder+Indeks+II) which has annual fee of 0,3% and coveres developing markets. Perhaps I will use 10-15% of my portfolio here.

Then I will almost own a share of "the whole world" for the cheapest amount possible, except for UK and some non-eurozone countries. But their economy is dependent on US and Eurozone economies so they do good when others good do and vice versa. So I am comfortable with not owning shares in these countries.


There is a currency risk for me in all of these funds. During the last 8 months the Kroner has gotten 25% weaker against the USD. And when the oil price goes up I could loose some money if I have foreign stocks. Norwegian Kroner is not pegged to the Euro. Its highly correlated with the oilprice and to some extent how swedens currency behaves.

Today I have some shares in this fund:http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F0GBR060IY which coveres like MSCI World AND its currency-secured or how to say it in english, it has some type of insurance so that when the norwegian currency fluctuates it has almost no impact on the fund. This fund has a annual cost of 0,3 so its more expensive.. Should I keep buying this fund aswell?

[kvaruni]

Your plan sounds good to me, very little I can add to it. Following this plan, you will cut your costs to about 0,1% on the face of it. Based on how much you are investing and how long you plan to invest, do make the calculations to see if the extra costs for buying more trackers isn't eating away the 0,2% you are saving compared to the fund in NOK.

The fund in NOK is quite a good one. Yes, costs are 0,3%, but that still isn't very high. It will take a very long time before you see the difference. Whether or not you should keep investing in this one comes down to a few questions. First, see above: calculate the actual costs as you need to buy more trackers. This will eat into the 0,2% you are saving, but only you can figure out how much. Second, are you willing to take the extra currency risk? Currencies are a big unknown, and there is no guarantee that any given currency will ever recover. Third, are you willing to put in some extra work? Notably, you will need to rebalance every so often to ensure that the correct asset allocation is maintained, which might increase your costs as you need to sell and buy. Based on these answers, your choice will be somewhere between a full switch to a new DIY portfolio, sticking to the tracker in NOK or anything in between.

[Spe]

Thank you for your reply. Its refreshing to have someone who makes me rethink my position :D

However I dont understand what you mean by checking if more "trackers" isnt eating away the 0,2%" What are trackers and how can they eat away my profits? It doesnt cost more if i buy 1 or 10 funds. There are no sale or buying costs except for a small currency transaction fee, but it is levied on the amount being transacted, not on the number of funds. Yes I will rebalance. I will not sell any funds because that will interfere with the interest-interest effect and I once I sell the fund I will have to pay capital gains tax. So my solution is Dollar cost averaging and if im short on for instance the emerging market fund and I need to rebalance this then I will buy only this fund when I get my paycheck and this will act as rebalancing tool. 

In Norway there is some (stupid) tax rule that any divident gains from outside EEA countries are taxed while divident gains from within these european countries are not penalized through taxes. Therefore I have an incentive for overexposure to european markets. Also the Euro is almost as weak as the Kroner at the moment. And the quantitative easing program of the ECB is just about to start. So Im pretty bullish on the european markets.

So based on your input I will try to hedge against currency and country risk by doing the following:

40% in the s&p fund (option 3)
20% in the currency hedged/secured fund KLP aksjeglobal
15% in emerging markets
25% in option 2, euro stocks.

But there is also one more thing I dont understand. What is the difference between ETF's and traditional index funds. I know that in traditional index funds you cant buy and sell them during the trading hours of the stock exchange. If you for instance buy it at 9am you will get to purchase it at the price it was valued when the trading stops at the end of the day. While ETF's you can buy at 10 am and potentially sell at 11 am with a profit. But is there any other difference between these types? Like costs or risks?

[kvaruni]

However I dont understand what you mean by checking if more "trackers" isnt eating away the 0,2%" What are trackers and how can they eat away my profits?

Oh, just a name, but the index funds you are buying are trackers. They try to mimic an index, such as S&P, MSCI ... , thus they track an index.

It doesnt cost more if i buy 1 or 10 funds. There are no sale or buying costs except for a small currency transaction fee, but it is levied on the amount being transacted, not on the number of funds.

No problem then. Rules are just different in every country, and with every bank. Some banks charge a flat fee for a transaction (regardless of the cost), others charge based on the amount of the transaction. It is the flat fee that can really eat into your investment if you invest in too many funds, but you seem to be lucky!

Yes I will rebalance. I will not sell any funds because that will interfere with the interest-interest effect and I once I sell the fund I will have to pay capital gains tax. So my solution is Dollar cost averaging and if im short on for instance the emerging market fund and I need to rebalance this then I will buy only this fund when I get my paycheck and this will act as rebalancing tool.

Excellent plan :). This might not work after one or two decades, but then you will be swimming in money anyway ;).

But there is also one more thing I dont understand. What is the difference between ETF's and traditional index funds. I know that in traditional index funds you cant buy and sell them during the trading hours of the stock exchange. If you for instance buy it at 9am you will get to purchase it at the price it was valued when the trading stops at the end of the day. While ETF's you can buy at 10 am and potentially sell at 11 am with a profit. But is there any other difference between these types? Like costs or risks?

You already list the biggest difference. An ETF is like a stock. You can sell it whenever you want, as long as you can find a buyer. This is immediately one of the risks. If there is an extreme market crash, nobody might be interested in buying it and you will have to significantly reduce the price. Of course, during such an extensive market crash it stands to reason that also traditional index funds will quickly loose their value. Since you can sell ETFs so easily, don't let yourself be swayed into day trading. ETFs and index funds in general really should be bought for the (very) long term. Buy and forget! Costs for both options seem to be on par. Finally, ETFs can sometimes be virtual. It shouldn't really matter, but some ETF don't buy actual shares but instead use tools such as futures. This is a good thing for you as it reduces the tracking error, which is the difference between the ETF and the index it is tracking. However, if things are to go very, very bad then futures will be worthless whereas the actual shares might still have been worth something. To be fair, I wouldn't worry too much about it, and it can be very difficult to figure whether an ETF uses futures or not.

For an even better overview of the difference, have a look at http://monevator.com/etfs-vs-index-funds-differences/ .