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.

Here’s why ETFs can be great building blocks for your portfolio:

  • Excellent diversification – you can access whole asset classes, geographies and specific sectors. And because an ETF offers exposure to an index that is itself a broad basket of securities, your portfolio is diversified even further. This reduces risk

  • Specialised – you can target a specific theme, such as an individual country, industry or kind of investment, such as small caps

  • Easily traded and generally liquid – at least during normal market conditions

  • Low-cost – annual fees are as low as 0.10%, with the standard 0.35% to 0.5%

  • Tax efficient – ETFs aren’t subject to the 0.50% stamp duty. London-listed ETFs are SIPP and ISA eligible

Funds explained by Russ Mould, AJ Bell Investment Director Russ Mould, AJ Bell's Investment Director discusses tracker funds.

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.

Help choosing an ETF

Researching individual ETFs can be daunting. That’s why we’ve created Our AJ Bell Favourite funds list, which includes our tracker fund or ETF picks. You can filter the list to create a shortlist, and easily access the fund factsheets and key investor information document (KIID) to help with your research. The AJ Bell Favourite funds list is not a personal recommendation.

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.

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Put your pension pot in your own hands with our award-winning self-invested personal pension.

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Invest £20,000 this tax year into our tax-efficient ISA, and access your money when you want it.

Dealing account

Our Dealing account is low cost and unlimited. Invest as much as you want, whenever you want.

Accounts for children

Build a nest egg for your children with our Junior ISA, Junior SIPP and Dealing accounts for children.

Lifetime ISA

Invest up to £4,000 per year in our Lifetime ISA and get a government bonus of up to £1,000.

Why deal in exchange traded funds with us?
  • Help choosing the right tracker fund for you portfolio with our Favourite funds list

  • Low-cost dealing charge for buying and selling of £9.95

  • Deal on the go with our mobile dealing app

  • Wide choice of exchange traded funds

  • Save regularly from just £25 per month

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