Exchange traded funds - costs

scarletjim

Please could someone clarify a few things for me on ETFs before I get out of my depth?

Firstly the background - ignore this paragraph if you like! I have about £100k that has sat in high interest bank accounts for the last couple of years, but I'm aware that I should be making that money work harder. I was hoping to buy a property to rent, but the market just didn't fall like many suggested it would. I have had my fingers burned before (only a few thousand loss, but still hurt) in the stock market about 8 or so years ago, so I have always been reluctant to go in that direction, but several times in the last few months I have seen the FTSE100 fall by, say, a couple of hundred points over a few days, and thought to myself 'i wonder if I should buy £100k worth of that now and sell when it goes up again, and 9 times out of 10 it was back at its original price a few days later...

Anyway, can someone check / correct my understanding of the costs involved please:

Say I bought £100k of a FTSE100 ETF at 4900 and sold at 5100 a week later, then I make that a 'gross' profit of about £4,080. Then if you estimate broker fee of £12.50 per trade, that's £25. And if the annual mgmt charge is, say, 0.4%, does that mean pro rata, so inn my example £100k x 0.4% x 1/52 = £8? So costs are almost nothing! Although presumably I'd have to pay CGT if I exceeded my annual CGT allowance? Could I set off losses against profits if I did such a transaction regularly? Am I missing something here in terms of costs or tax?

Apologies if I'm being stupid, I have always worked in financial services, but never in investments, so my understanding of such thnigs is very basic, I never even knew ETFs existed until today. So I've read up about them for the last few hours, but I'm still just a beginner obviously...

So any advice or comments would be greatly appreciated!

ozzage

The management costs are already rolled up into the price, so if you buy at 4900 and sell at 5100 the management cost has already been taken out, if you look at it that way.

So your only cost is the £25, plus as you say any CGT if applicable. And yes you can offset losses against that plus as you already know you have the allowance first anyway.

The danger of buying and selling £100K of a FTSE ETF within a week doesn't come from the costs, it comes from risk in the FTSE dropping... :P

sabretoothtigger

Sounds like a good question. The cost probably is applied through the spread, the difference between buy and sell price. Like when you see a free holiday money service, its not really because they skim a little off the top

scarletjim

Hmmm if the management charge is applied through the spread then that isn't such good news - if it was pro-rata over a year, then 1/52 of an AMC wouldn't be much, but if it's applied by the spread then I am basically paying the full management charge each time I trade.

Yes of course the FTSE100 dropping is the biggest risk here, but I think that's a risk I'd be prepared to take given where it is now. Even if it continued to fall overall over the next 12 months, I'd expect that buying after each huge fall, and selling after each large rise would still prove profitable over 12 months. But who knows...al part of the fun hey?

sabretoothtigger

paying the full management charge each time I trade

Thats not likely. Some people buy and sell an etf dozens of times a day. I dont know how exactly they do it but they wont lower the value of the etf in one go.
Theres 510 trading minutes in a day, maybe each minute they reduce the price by a minuscule amount or maybe its once a day but they wont overcharge you for every trade

It could be they take it out of the dividends paid quarterly

The total difference between NAV and price over a year will be the management charge

Over a year ISF underperformed the FTSE100 by 0.51% and the official management cost of it is 0.4%


http://uk.ishares.com/en/rc/funds/ISF

turbobob

Hi, I believe the spread covers the market makers and the exchanges cut. The annual management charge is taken account of in the share price. The spread varies depending on the liquidity of the ETF. I think basically ETF's traded on the London exchange are divided up into various market segments depending on their average volumes, and this determines how large the spread can be. At least thats how I understood it - theres a lot of technical info on the London Stock Exchange site if you wanted to look this up. The "top tier" ETF's (e.g. ISF, a few million traded every day) have a low spread. The less frequently traded ones tend to have higher spreads.

scarletjim

Hmmm, I've just looked at the ISF link above. Right now, the Ask Price is 5.15 and the Bid Price is 5.14. This may sound very close, but if you calculate the effect of that difference on, say, £100k, then you are paying nearly £200 cost per trade! That can't be right surely? Do the Ask / Bid figures normally have additional decimal places in real life, or are they really that 'rough'?

EDIT: But 20 mins later the Bid and Ask Price are now the same! Presumably this suggests they are only approximate figures? If so, that sounds a bit silly to me... Now I'm confused...

turbobob

At the time of writing the bid is 514.7p the offer is 514.9p - a spread of 0.04%

scarletjim

turbobob wrote: »

At the time of writing the bid is 514.7p the offer is 514.9p - a spread of 0.04%

So if I bought online, the cost will be that 0.04%, plus a (presumably very small) broker fee? So say for argument's sake on £100k, a spread of about £40 and a broker charge of say £15? Not too bad...