Answers to common questions about ETFs
31 May 2017
There's no denying the dramatic growth in exchange-traded funds (ETFs). Over the past ten years, global ETF assets have increased from about £450 billion to over £3 trillion,* growing at a clip that's more than three times faster than traditional fund structures such as unit trusts and OEICs.
This is good news because it means investors are, largely, taking advantage of low-cost, broadly diversified investment options.
Even so, your clients probably still have questions about ETFs and the role they can play in their portfolios. To assist you, here are some of the most common questions we hear about this fast-growing investment vehicle.
What is an ETF?
Basically, an ETF is like a traditional unit trust or OEIC, except that it trades on a stock exchange like company shares. This means ETFs are constantly priced during trading hours, instead of once daily as with traditional funds. It also means you need to buy and sell them through a stock broker or a brokerage platform such as that offered by Vanguard.
How are ETFs different from mutual funds?
In addition to intraday pricing and trading, a key differentiator is that most ETFs are index funds, meaning they attempt to match the performance of existing market benchmarks, or indices. The majority of assets in mutual funds, on the other hand, are in active strategies that seek to outperform the market.
Intraday trading isn't necessarily an advantage or disadvantage – it may simply be a preference for some people. Investors who aren't interested in trading frequently can also invest in ETFs (like traditional funds) via monthly investment plans.
Why have ETFs become popular?
While ETFs have been around for nearly 25 years, they have really exploded in the past five thanks to growing recognition of the importance of low-cost investing.
Can you invest in an ETF within an ISA?
Generally yes. Investors can hold any of Vanguard's ETFs in tax-advantaged Individual Savings Accounts.
Are ETFs cheaper than mutual funds?
In many cases, yes. Often, when people discuss ETFs' cost advantage, they are comparing ETFs with the broad universe of funds. ETFs tend to be cheaper than traditional funds on the whole because they mostly follow a less expensive indexing strategy. In the United States, 75% of all dollars managed by traditional funds, on the other hand, are invested in more expensive active strategies.
*Source: Morningstar and Vanguard calculations as at March 2017.
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