Investing in exchange traded funds
Exchange traded funds, or ETFs, are a type of collective investment. They’re also called ‘passive’ or ‘tracker’ funds – because, unlike an active fund, the fund manager is ‘passive,’ and doesn’t try and outperform a specific stock market index (such as the FTSE 100). Instead, they aim just to follow, or ‘track,’ the index’s performance. Other indexes that ETFs track include bonds, a selection of commodities or a basket of companies share index.
Because ETFs are not actively managed, there’s no risk of fund manager error. It also means lower fees, coming in around 0.3% to 0.5% a year – sometimes even cheaper. The downside is that unlike a (well-managed) active fund, an ETF won’t beat a benchmark, just track it.
ETFs can be bought and sold like ordinary shares and can be added to your self-invested personal pension (SIPP), ISA or Dealing account.
But investing in ETFs isn’t without drawbacks. The main one being that ETFs are unlikely to outperform their benchmark index, just track it, minus the running costs and fees. Additionally index-matching performance isn’t guaranteed – tracking differences can mean the fund falls short of the index's performance. The main cause of tracking differences are expenses incurred in trading and tax withholding on dividend payments. Another risk is tracking errors – these can cause volatility in the ETF's quoted price relative to changes in the underlying benchmark.
How to invest in ETFs
Investing in ETFs is simple. They can be bought and sold online just like shares and as they are traded on the London Stock Exchange you can get an online quote between 8.00am and 4.30pm Monday to Friday. There’s a wide choice of ETFs to choose from, and to make it easier we’ve created the AJ Bell Favourite funds list – including our picks of the best ETFs.
For buying and selling ETFs, we have a £9.95 online dealing charge, and a custody charge for holding the fund. You’ll also pay a charge to the fund itself – usually called the fund manager's charge. These charges are included in the fund price, and can be found on the fund factsheet. To view our costs for dealing and holding ETFs, click here.
Save regularly using ETFs
You can save from £25 per month into a wide range of tracker funds using our regular investment service. Set it up online and we’ll invest automatically for you every month into the fund of your choice. It’s a great way to save regularly and build up your portfolio. For more information, visit our regular investment page.