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This video tutorial takes you through a comparison of the four main fund structures.

Transcript

In order to put ETF’s in context it is useful to compare them to other types of fund.

The four we will consider are: OEICs or Open Ended Investment Companies, Unit Trusts, Investment Trusts and of course Exchange Traded Funds.

By considering specific attributes of these funds, the differences and similarities will become clear.

OEICs, for example, are open-ended pooled investment funds as are ETFs.

This open ended nature allows for the creation and redemption of shares.

Thus the fund expands or contracts to meet the investor demand.

They are established under company law.

They trade once a day with the fund manager, at a single price. This price is calculated using the NAV so there is no discount or premium.

They are also single priced, so there is no spread.

They trade directly with fund manager, online platform or adviser (not a stock exchange).

They can, like all 4 of these funds be ‘wrapped’ and held in an ISA or SIPP account.

Next up is the Unit Trust.

They are open-ended pooled investment funds, the same as OEICs and ETFs.

In this instance the open ended nature allows the Trust providers to create and redeem UNITS, rather than shares. And the fund expands or contracts to meet the investor demand.

They are established as trusts rather than under company law.”

Another difference is that although UTs prices are directly linked to NAV, they’re also dual priced with the difference reflecting that of the underlying market securities. This is known as the bid-offer spread.

They can, like all 4 of these funds be ‘wrapped’ and held by investors in an ISA or SIPP account.

Investment Trusts

Then we have Investment Trusts. These are closed ended fund that cannot expand or contract according to investor demand.

Like ETFs, they’re traded on a stock market, can be traded at anytime during market hours at real-time prices, often through a stockbroker and can be ‘wrapped’ in an ISA or SIPP account.

They are dual priced with a spread, like Unit Trusts, and their price is driven by market demand so can vary from the NAV.

ETFs

Finally, we come to ETFs – how do they compare?

We have seen that ETFs share many characteristics with other traditional funds...

They are open-ended, so the fund expands and contracts to meet investor demand.

They are traded on a stockmarket, usually through a stockbroker and can be traded throughout the business day.

They can be ‘wrapped’ in an ISA or SIPP account.

However a significant difference lies in the pricing of the fund.

They are dual priced with a spread, but the trading price is normally kept very close to the NAV of the underlying assets through the useful intervention of market participants – a mechanism called arbitrage.