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DIY Investor Magazine
/
September 2016
You can also get a feel for an ETF’s bid-offer spread by
observing the sell and buy prices on its website over
a couple of days. If you’re a day trader then bid-offer
costs can mount up. If you trade infrequently in big,
liquid ETFs then the spread will scarcely matter.
Certain tracker funds offer a single price that appears
to do away with the bid-offer spread. Funds structured
as Open Ended Investment Companies (OEICs)
generally offer a single price while funds structured as
Unit Trusts generally offer dual-pricing with a bid-offer
spread. In reality, OEICs still have to cover the cost
of transactions and this is passed on to all investors
through other expenses.
TRADING FEES VS PLATFORM FEES
You will always pay a commission to your broker when
trading ETFs. However, some brokers will not charge
you a platform fee for holding ETFs in your account.
The reverse is true for tracker funds. You will always pay
a platform fee for holding them but some brokers won’t
levy trading fees.Generally the larger your holdings, the
more important it is that you avoid platform fees. While
it may be more beneficial to you to avoid trading fees if
you trade often and in small amounts.
A good tip is to pick a broker with a regular investment
scheme that only charges £1.50 to buy. You can also
purchase a single ETF at a time for your portfolio and
buy quarterly or six-monthly to increase the size of your
trades and thus lower the impact of trading fees.
SYNTHETIC VS PHYSICAL
All tracker funds physically hold most of the securities
that make up the indices they track.
Some ETFs use a different method called synthetic
replication.This means that the ETF provider enters
into an arrangement with a large financial institution
(generally a global bank) that delivers the index return
to the ETF while the bank receives cash and collateral
in exchange.
Synthetic replication enables ETFs to track certain
markets that would otherwise be inaccessible due to
trading issues. The compromise however is accepting
that synthetic ETFs are exposed to the counter-party
risk of a default by their financial partners. Although the
risk is small you can avoid synthetic ETFs if you prefer
by using physical replicating ETFs.
VAST CHOICE VS LIMITED CHOICE
ETFs enable you to invest in a diverse and interesting
range of markets from forestry to technology. You can
invest purely in robotics companies, or global water or
renewable energy to pick out just a few.
Smart beta products are predominantly ETF based
and commodities only exist in ETF or Exchange Traded
Commodity (ETC) formats. The ETF market is a fast-
moving space and new ideas are continuously being
tested and launched.
Tracker funds are comparatively few in number and
generally restrict themselves to the biggest world and
regional markets like the FTSE All-Share, S&P 500 and
MSCI World.Innovation and competition is less fierce
among the major tracker fund players which means
ETFs should be considered if you wish to construct as
diversified a portfolio as possible.
justETF is the independent knowledge
base for ETF strategies, providing
,
Portfolio simulations
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