The Advantages of ETF Investing

• Level: For beginners
• Reading duration: 7 minutes

ETFs have accumulated several trillions in assets under management since their benefits first came to the attention of savvy investors in the early noughties. Their popularity and credibility has only increased since then. We explain why institutional players and DIY investors alike buy into ETFs.

ETFs: 15 reasons why

1. Easy: ETFs can be bought and sold on the stock market like any other share. 2. Cost-effective: Fees are low compared to active funds. Active funds as a group fail to beat the market in the long-term after costs such as fees and taxes. Whereas ETFs aim to match the market return minus costs. The negative compounding effect of active money’s higher costs means that equivalent ETFs typically win over time. 3. Diversification and time management: Owning an ETF gives you exposure to dozens, hundreds, or even thousands of securities covering every worthwhile asset class. It’s an instant solution to the problem of constantly trying to pick winners and losers. Instead of trying to predict the market you simply own the market. 4. Transparent: You always know what an ETF is doing. It is designed to replicate the returns of its stated market index – so your return should match that index’s performance after costs and tracking error. You can check the holdings and exposures of your index anytime on its web page. 5. Choice and control: There are over 1.600 ETFs listed on the London Stock Exchange. Together they enable you to invest in every country, region, sector, and asset class that you need. From ethical investments to AI, from precious metals to genomics – ETFs enable you to invest in the future of the whole world. 6. Safe: ETFs are provided by large and highly capitalised financial institutions such as BlackRock, Vanguard, HSBC and State Street. In the unlikely event that any of these companies go bankrupt, Europe-wide regulations and compensation schemes exist to protect your assets. 7. Liquid: ETFs can be traded whenever you like during normal stock market hours. Contrast that with traditional funds that can only be traded once a day. 8. Ultra-low dealing fees: Some brokers offer zero commission trading while others offer very cheap regular investment plans. 9. Affordable: Fractional trading means you can buy an ETF from as little as 1€ or £1 with some brokers. Other brokers request a minimum contribution from 25€ / £25 or 50€ / £50 a pop. 10. Simple to understand: Investing in stocks is best left to the professionals, but even active funds require a lot of research – and you're still never sure how the manager is running your money. Meanwhile, ETFs are extremely straightforward even for inexperienced investors. Everything you need to know about an ETF is published on its webpage. 11. Income investing: You can live off natural yield with a portfolio of high-dividend paying ETFs. Lower costs mean more income goes to you. 12. What you see is what you get: The price of ETFs typically stays close to the actual value of their assets. Unlike Investment Trusts, ETFs do not suffer from the additional risk of trading at a premium or discount to their underlying holdings. 13. Easy to compare: The ETF industry features many market players competing to reduce product costs and launch innovative new offerings. There is plenty of choice and so we’ve focussed on making comparison quick and easy. justETF's powerful tools enable you to rapidly analyse the cost, return and risk characteristics of ETFs, so you can make the right choice for your portfolio. 14. ISA and SIPP friendly: The vast majority of ETFs can be held within SIPPs and ISAs, so your profits can accumulate tax-free. 15. No stamp duty: Investment Trusts and most UK shares incur Stamp Duty Reserve Tax (SDRT) at 0.5% on purchase. Thankfully this tax doesn’t apply to ETFs – which is another reason why their total cost of ownership is very low.

Are ETFs always the right choice?

• Cash: If you want to hold cash, it’s usually better to do so using an ISA or savings account rather than a money market ETF. A competitive deposit account should earn a higher interest rate, there won’t be any dealing fees, and the maximum level of compensation is greater for cash in the bank versus an ETF provider.
• Temptation to overtrade: Many traders (including hedge funds) use ETFs. But excessive trading can increase costs and potentially reduce returns. Some people find it easier to buy and hold using a less flexible index fund. If that’s you, then an old-school fund may be a better psychological fit.
• Not always cheaper: Occasionally the lowest cost index fund will be a smidge cheaper than its ETF equivalent. This is something to look out for in well-served markets such as FTSE 100 trackers.
• High-risk products: Leveraged and short ETFs are highly specialised investments that are mainly intended for short-term use by institutional players. Only invest in niche products if you are absolutely sure you understand the risks.
• Illiquidity: While most ETFs are very liquid, some small and niche ETFs may rarely trade. Low trading volumes can mean a costly bid-offer spread. An appropriate mutual fund may be a better alternative.
• No outperformance: An ETF aims to match the returns of its index. Investing your money with an active fund manager can work out better periodically, especially if you get lucky. Pitted against that hope is the firm evidence from numerous studies that active funds fail to beat index-tracking products on aggregate.

The decisive advantage

The rise in popularity of ETFs is no accident. Most investors find that an ETF portfolio enables them to easily execute their investment strategy – whether they want to build wealth or live off income. Naturally, it’s always best to do your research first. Our strategy builder and screening tools are a great way to get started.