ETF or Mutual Fund?

Voyager2002

What are the advantages and disadvantages of using one or the other of these investment vehicles?

The issue arises for me because I would like some exposure to the large pharmaceutical companies (mainly in Europe). Fidelity offers a mutual fund that covers the sector, but with a TER of 1.93 per cent. Then I found an ETF (EXX4) based in Frankfurt that seems to do a similar job, but with a TER of 0.5 per cent. However, I am sure that there are more differences than the price tag.

mr_fishbulb

Looking at the TERs I'm guessing the ETF is a tracker and the Fidelity one is a managed fund. Could you put up links to both as I had a hard time finding them on Google.

For a lot of mutual funds, if you purchase them through a fund supermarket (e.g. Hargreaves Lansdown) then the TER is all you pay as the up-front charges are not charged in most cases. However ETFs attract other charges on top of the TER such as dealing costs to buy and sell, also the bid-offer spread.

Voyager2002

Thank you for the explanation.

The ETF that I am looking at is http://uk.ishares.com/en/pc/funds/EXX4
I just discovered that I can buy it through the funds supermarket that I use, but with a commission on purchase: 28 Euro on up to 100 units (4,000 Euro invested). The Fidelity fund has ISIN LU0114720955.

mr_fishbulb

Yup they are two different approaches. The ETF will track the EURO STOXX® Health Care Index whilst the Fidelity fund will pick and chose which companies to invest in across the European Healthcare sector. It's up to you if you believe the Fidelity actively managed funds can beet the index after charges (you will find both schools of thought on here).

If you read this report on the Fidelity fund, the last paragraph says:

During her tenure, Natoff has outperformed the average fund in the Morningstar Equity Sector Health Care category as measured by both risk and return figures. Although the fund's favourable risk and return characteristics speak for themselves, we are less impressed by the price of this fund. Its TER is about 10 basis points above the sector fund median. Still, we are sufficiently impressed by the manager and her analyst backup, and we give this fund a Superior rating.

JamesU

Voyager2002 wrote: »

What are the advantages and disadvantages of using one or the other of these investment vehicles?

I like etfs but feel EXX4 is biased geographically (65% France) and far too heavily biased in a single company (Sanofi-Aventis is 55% of the fund, see p.2 in link below). Insufficent diversification.

http://de.ishares.com/en/rc/stream/pdf/false/publish/repository/documents/dffs_comit/de/CURRENT/PDF/!!!!!!_EQ_EXX4_DE0006289333_DE_en.pdf

JamesU

Cautious_Investor_3

mr_fishbulb wrote: »

However ETFs attract other charges on top of the TER such as dealing costs to buy and sell, also the bid-offer spread.

For mutual funds there are also 'hidden' charges on top of TERs.

The Cautious Investor