Fund or ETF? Which is better?

horlicksjan

I am looking for a low cost FTSE tracker. I don't want income so want dividends reinvested. After doing research I found Vanguard funds well reported for low cost passive investing.

I have put some savings into Vanguard FTSE U.K. Equity Index Acc, it has a TER of 0.15% p.a. and supposedly no initial or exit fees. However when my contract note came through it showed 0.5% charge. Sippdeal said this was charged by Vanguard, so I phoned Vanguard and they say it is Stamp Duty and has to be charged.

There is an alternative ETF - Vanguard FTSE 100 ETF (GBP) VUKE. This has a TER of 0.1% p.a.

As fas as I can tell the main differences are:
ETF - 0.05% cheaper TER (negligible so not worth factoring in)
ETF - no Stamp Duty? 0.5% of the initial investment
EFT - can buy, sell, during trading hours, not a once a day valuation point
EFT - buy/sell spread - appears to be 0.15% when I look on live dealing.

The Morningstar data shows the Fund has a yield of 3.54% and the ETF 2.45% for the last 12 months.

Has anyone got experience of either fund or can suggest whether it is better to stick to the Fund and pay 0.5% initial Stamp Duty, or move to the ETF?

redbuzzard

All funds that hold actual equities have to pay stamp duty and dealing costs. The funds that don't explicitly charge this just take the costs out of the fund. I suppose these should be in the (historic) TER though, maybe somebody can tell us.

Vanguard instead charged a "dilution levy" though I thought this was typically less than 0.5% because they net off sales and purchases. From memory this was about 0.25%, but on HL for example it is indeed now showing as 0.5% and referred to by them as stamp duty reserve tax. Maybe the funds are growing so much that the net of it is close to 0.5% anyway.

The Vanguard explanation is here, though I'm not sure how up to date the document is -

https://www.vanguard.co.uk/documents/inst/literature/protecting-investors-from-dilution.pdf

All funds have dealing or synthesis costs of some kind and if they aren't explicit they are just taken out of the fund, reducing the unit value.

Re funds vs. ETFs - when I agonised about this I could find no way of coming to a firm conclusion. Funds are simpler for buy-and-hold investors. ETFs are better for traders not least because they have a known price you can deal at, or not.

Some platforms charge for holding shares and ETFs, HL charges 0.5% p.a. IIRC, capped at £200 total, but check.

Roustabout

redbuzzard wrote: »

All funds that hold actual equities have to pay stamp duty and dealing costs. The funds that don't explicitly charge this just take the costs out of the fund. I suppose these should be in the (historic) TER though, maybe somebody can tell us.

Vanguard instead charged a "dilution levy" though I thought this was typically less than 0.5% because they net off sales and purchases. From memory this was about 0.25%, but on HL for example it is indeed now showing as 0.5% and referred to by them as stamp duty reserve tax. Maybe the funds are growing so much that the net of it is close to 0.5% anyway.

The Vanguard explanation is here, though I'm not sure how up to date the document is -

https://www.vanguard.co.uk/documents/inst/literature/protecting-investors-from-dilution.pdf

All funds have dealing or synthesis costs of some kind and if they aren't explicit they are just taken out of the fund, reducing the unit value.

Re funds vs. ETFs - when I agonised about this I could find no way of coming to a firm conclusion. Funds are simpler for buy-and-hold investors. ETFs are better for traders not least because they have a known price you can deal at, or not.

Some platforms charge for holding shares and ETFs, HL charges 0.5% p.a. IIRC, capped at £200 total, but check.

HL Charge 0.5% p.a capped at £45 per year for ISAs

http://www.hl.co.uk/investment-services/isa/savings-interest-rates-and-charges

Our preference is for ETFs and Investment Trusts plus individual shares. Although we are buy and hold for the long haul I, more than my wife, prefer to see the prices as a live price and not updated once a day as is the case with OEICs and UT's

Shaolin_Monkey

The main differences IMO are:

They track different indexes. The FTSE 100 only includes the largest 100 companies, while the FTSE All Share also includes the mid sized FTSE 250 and Small Cap indices. The FTSE 100 and FTSE All Share largely follow each other about on a day to day basis but over time differences in performance do open up.

You'd have to consider transaction costs. Often but not always, funds have free dealing while with ETF's you have to pay fees to buy and sell. Some firms do now charge a dealing fee for funds as well though.

The fund is available in accumulation and income versions. The ETF distributes it's income so to re-invest dividends you will have to buy more shares. This will incur transaction costs. Some brokers offer reduced fee transactions for dividend re-investment. Others will charge the full price.

Personally I think the most important consideration should be whether you want to track the FTSE 100 or the FTSE All Share, and then look at the options available to track whatever index you choose.

Roustabout

I believe that Investment Trusts might gain popularity due to a change in IFA commission payments.

horlicksjan

Thanks for the replies. Although I like the idea of seeing the actual price and dealing (ETF), rather than a fixed end of day price (Fund), I think I will stick with the Fund because it looks like the ETF may incur dealing costs and Stamp Duty applies to both anyway.

dunstonh

Roustabout wrote: »

I believe that Investment Trusts might gain popularity due to a change in IFA commission payments.

More likely that most IFAs couldnt recommend ITs before RDR. However, given the extra risk involved with most ITs compared to their comparable UT and that fact that ITs are frequently more expensive than the UT, you wouldnt expect a big increase.

Ark_Welder

FT: Market turbulence revives fears over ETF structural issues
FT: ETFs under scrutiny in market turbulence
FT: Bond sell-off causes stress in ETF industry

Glen_Clark

Ark_Welder wrote: »

FT: Market turbulence revives fears over ETF structural issues
FT: ETFs under scrutiny in market turbulence
FT: Bond sell-off causes stress in ETF industry

Interesting links, Thank You.
As I understand it their main concern seems to be possible delay in being able to buy or sell certain types of ETFs in times of extreme volatility. (because the dealer has to trade a basket of shares or bonds rather than cash to acquire or redeem ETF units from the provider, which may take time to get together when trading volumes are very high) This may be a serious concern for someone trying to make money out of day trading in bond markets. But it should not be of much concern to a long term investor in a share index ETF?

Ark_Welder

Glen_Clark wrote: »

But it should not be of much concern to a long term investor in a share index ETF?

Agreed, if they're physical ETFs. I would also include in a 'safe list' ETFs that track UK and US sovereign bond indices - although they're unlikely ever to be my chosen method of exposure (but never say never...).

Probably more of an issue where less liquid assets are tracked, or used for collateral - as may be the case for some synthetic ETFs (a good reason for understanding what assets are used for collateral).

grey_gym_sock

yes, i don't think it's very important for long-term investors. especially if you're comparing ETFs to funds, since you can only trade funds once a day and blindly (i.e. with forward pricing).