What are the benefits of ETFs?

General
1

It is well known that ETFs (exchange-traded funds) have become a popular investment worldwide for many reasons.

Here are 6 of them:

  1. They’re simple.

ETFs let you invest in an entire market (whether shares in the UK or the US, gold, or something else), quickly and in a single transaction. And while other investment funds try (but often fail) to pick the best-performing shares, ETFs simply aim to track the performance of the market index. The Vanguard FTSE 100 ETF, for example, seeks to match the returns of the FTSE 100 index of the biggest UK shares such as Lloyds Bank and Tesco.

  1. They offer a wide investment choice.

Whether you want exposure to an individual stock market like the US’s Nasdaq, or a global share index or region such as Europe or Asia, there are plenty of ETFs to choose from. There are also ETFs for tracking a wide range of bond indexes (covering UK gilts or US Treasuries, for example), as well as the price of gold or other commodities — even for bitcoin. Thematic ETFs, which have a specific focus such as climate change (eg. L&G Clean Energy ETF) or digitalisation (eg. iShares Digital Security ETF) have also multiplied in recent years.

  1. They’re low cost.

ETFs have some of the lowest investment costs around, so more of what you make goes in your pocket rather than someone else’s. The annual management charge on some ETFs is as little as 0.05% — just one-twentieth of 1%, equivalent to 50p a year on a £1,000 investment — and there are lots of ETFs costing less than 0.3% a year.

  1. There’s ZERO stamp duty to pay.

With most share purchases in the UK, investors have to pay 0.5% stamp duty. But with ETFs there’s no stamp duty. This tax saving gives your investment a head-start as you’re not losing half a percent of your money upfront.

  1. They’re diversified.

ETFs often hold hundreds or even thousands of individual shares or bonds. This spread means you’re less exposed to falls in the value of any one holding, and reduces overall risk.

  1. They can be bought and sold instantly.

Like shares, ETFs can be bought and sold without delay during stock exchange opening hours. This is more flexible than investment funds like unit trusts, which can only be bought or sold once a day through their fund manager.

Thinking of more reasons which are not on this post? Share yours by hitting the reply button!

Important information

Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest.
This communication is provided for general information only and should not be construed as advice.
If in doubt you may wish to consult a professional adviser for guidance.

4 Likes
2

Whilst I agree - only number 6 is an ‘advantage’ over the existing open ended index tracker funds - everything else was already available.

3

The post wasn’t necessarily explaining the benefits versus regular index funds.

But now that you bring it up the biggest advantage over index funds is the capital gains treatment.

If someone who has a large position in a fund decides to exit, they can trigger a huge cost to the fund via capital gains.

I read recently that a very cheap fund which used to have a £100m minimum holding reduced this minimum to £5m. Institutions then moved out of other funds to join the cheap one and the funds being exited had huge selling events and the fund holders had to suck up charges.

An ETF will never have such an issue.

4

Is that in the UK? I know ETF’s have a tax advantage in the USA - but I didn’t think that existed in the UK.

5

I don’t think there’s any tax difference in the UK between ETFs and other types of investment funds…or am I wrong? The US tax system can be quite different to the UK and a lot of articles about ETFs/investment on the internet are talking about the US…beware! (And Vive la Difference!)

6

That’s my understanding Womble - hopefully Josh can clarify

7

Hi,

Maybe I didn’t explain it well.

But when a normal fund has people selling they also need to sell the underlying assets if there isn’t enough buyers. If a institution like a pension fund exits with £50m of assets they will need to sell the assets to pay them. This can trigger capital gains taxes on the fund which is paid by those left behind “a cost of trading”.

An ETF is sold on an exchange so underlying assets are not sold and you need to find a buyer too.i read this somewhere but can no longer find it! If I do, I will share it!

8

I understand what you’re trying to say Josh - just not sure it’s correct in the UK.

In the USA what you say is correct - mutual funds pay capital gains tax when they sell the underlying assets at a profit. So in the USA there is clear tax advantage for ETF’s - they should perform better as they have less frictional costs.

I don’t think, but I’m not sure, that’s the case in the UK. Mutual funds in the UK have lots of different tax rules. Interested if you have a link to anything for the UK situation. Thanks

9

This video explains it. He is American and may not apply in UK I guess.

1 Like
10

Yep - he is talking about the situation in the US - with US funds, US based investors and US tax rules.

1 Like