Exchange Traded Funds (ETFs) aim to imitate the performance of a particular market or index, for example the FTSE 100. Similar to a traditional tracker fund, the value of an ETF is determined based on rises and falls in the market. However, ETFs differ in that they are traded just like individual stocks on an exchange such as the London or New York Stock Exchange, and can be purchased and sold through brokers, in the same way as any other listed stock. Exchange Traded Funds also often allow you to reach foreign markets which are usually out of reach of the typical investor. Read on to discover more about how ETFs work and how to get started.
What is an ETF?
Exchange Traded Funds are passive investments, meaning that there is no fund manager who actively decides which assets to buy or sell. An ETF will have holdings in every company on the index and only buys and sells these holdings in order to reflect market movements. One of the main reasons why ETFs are so attractive when compared to traditional trackers or active funds is that they are continuously priced throughout the day rather than once a day. Because of this, unlike active funds or traditional trackers, you will know what the price will be before you invest your money.
Costs of ETFs
Most ETFs will levy lower annual charges than even the cheapest of traditional tracker or active funds, however, similar to stocks, you will need to pay a dealing fee as well as sell ETF shares, which can sometimes be problematic for investors who trade frequently, or regularly invest large sums of money. In regards to the annual charge to investors, Exchange Traded Funds tend to be significantly cheaper than the vast majority of unit trusts or Oeics. Although costs do vary, they can sometimes be as low as 0.1%. But, it’s important to keep in mind that there will be stockbroker costs, but no stamp duty costs. Most popular investing platforms will provide access to ETFs, but you should always consider the annual administration and dealing fees which will push up the total cost of investing. You will also be required to make a decision regarding the product types that you invest in. Some platforms will be more suited to fund dealing, whilst others will be better for shares and investment trusts, with others offering a wider range of products.
What are the Downsides?
Any good investor will explore any possible downsides before making an investment decision, and this is just as important when it comes to investing in an ETF. Because an ETF is a passive investment which mirrors a market or index, the success of your investment will be wholly dependent on the fortunes of the market or index in which you are invested. If you plan to trade large sums of money, it’s also important to consider that trading costs could significantly rise.
If you are looking for an investment opportunity with no stamp duty and continuous pricing, ETFs are a good choice.