What are ETFs
ETFs are index tracking funds that are traded on an exchange such as the London Stock Exchange. They combine the ready-made diversification of unit trusts with the simplicity of shares. They are eligible for ISAs but attract no stamp duty, ETFs have some of the lowest annual charges of all collective investment schemes. First introduced in 2000, there are now a number of ETFs available, tracking equity and fixed income indices in the UK and around the world.
In 2006 the London Stock Exchange became the world’s first exchange to offer a multi-currency trading service for ETFs giving investors a tax-efficient and currency risk-free alternative to buying ETFs in the US markets.
A summary of how ETFs compare to similar products:
ETF |
Unit Trust |
Investment Trust |
|
|
Structure |
Open-ended. Price directly linked to NAV |
Open-ended. Price directly linked to NAV |
Closed-ended. Price indirectly linked to NAV and driven my market |
|
Trading |
Anytime during market hours at real-time prices |
Once a day on unknown future prices |
Anytime during market hours |
|
Buy |
Through a broker |
From Fund Manager, Supermarket or IFA |
Through a broker |
|
Unit/Shares price |
Close to NAV (minimal tracking error) |
At NAV (once in 24 hours) |
At discount or premium |
|
Investment style |
Tracker |
Active or Tracker |
Active (small no. of tracker) |
|
Stamp duty (on purchase) |
No |
No |
Yes |
|
Initial charges |
0 + broker's fee |
Up to 1% & broker’s fee (if through broker) |
Typically 0 + broker’s fee |
|
Annual charges |
0.20 - 0.75% |
Up to 1.75% |
Typically around 1% |
|
PEP/ISAble |
Yes |
Yes |
Yes |
With ETFs the fees are minimal, and trading is much more convenient. You don’t have to write off a whole load of forms, you can buy and sell within a day.
Justin Urquhart-Stewart, 7 Investment Management.