Exchange Traded Funds are being promoted as an easier and lower-cost way to invest than using normal funds like unit trusts.
ETFs do have advantages, but our selected index tracker funds are still the best way for investors to buy UK shares.
Index tracker funds produce better returns than the vast majority of actively managed funds over long periods of 10 or 15 years. This has been conclusively established by many academic studies. So, for a ‘buy and go to sleep’ investment, they make sense.
That doesn’t mean you should just buy index trackers and nothing else - see our Guide to Asset Allocation and our
Model Portfolios.
Compare UK index trackers with our best buy tables Two choices for investorsBut when it comes to choosing a UK index tracker, you now have two choices. You have unit trusts and OEICs, and you have Exchange Traded Funds.
Both do the same thing: they buy a portfolio of shares exactly corresponding to an index, which for the UK is either the FTSE 100 Index or the wider FTSE All Share Index. They make changes to their investments only to keep them in line. The share indices are revised every three months and the funds sell the shares that leave the index and buy those that enter it.
Unit trusts and OEICs have been around for decades and have lots of specific regulation and investor protection. ETFs are newer and while investors still have the backing of the Financial Services Compensation Scheme, they are not regulated in the same way. This is because ETFs are listed on the London Stock Exchange and are traded just like other shares.
That in fact is the big advantage as far as some investors are concerned. A unit trust is priced and dealt in once a day, while you can buy and sell ETFs at any time during the LSE trading hours. There is also a small advantage in that with a unit trust/OEIC you pay Stamp Duty at 0.5% when you buy, but you don’t pay this with an ETF. Otherwise, the tax treatment is the same.
Order free information on savings plans here Low charges all roundThe annual management costs of ETFs vary but the ones tracking the UK indices all charge 0.4% a year. That is pretty much in line with our
Best Buy Tracker Funds.
So the question really comes down to this: Do you want to hold your investment through a sharedealing account or a fund supermarket? In both cases, you should pay no annual management charge for your account.
But most online stockbrokers levy minimum dealing charges of £10-12, so this will be the minimum charge you pay when you buy an ETF. In a fund supermarket, you can usually buy an index tracker with no initial charge, so there’s no buying cost at all.
If you’re a ‘buy and hold’ investor, then the fund supermarket is probably the better route, while if you plan to get in and out of the market frequently then the ETF is better. If you want to save monthly, the fund supermarket wins because ETFs don’t have a simple regular saving facility- and each time you buy you will pay the broker’s minimum dealing charge.
Compare UK index trackers with our best buy tables Not all trackers are bargainsDon’t run away with the idea that all tracker funds are bargains. I’ve criticised Virgin before for claiming its own index tracker is cheap: it isn’t, because it charges 1% a year, or three times our ultimate Best Buy, Fidelity Moneybuilder UK Index. Plenty of other groups, including HSBC and Legal & General, run trackers with much higher charges than our
Best Buys.
One of our low-cost tracker funds is eminently suitable for long-term regular saving or ‘buy and go to sleep’ investing, both of which are strategies almost certain to make you a lot of money over a period of 10 years or more.
Important risk warning - please readThe value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
