Fund or ETF? Which is better?

princeofpounds

ETFs have always performed a bit of a magic trick.

They generally sell themselves as the most efficient way to deliver benchmark performance.

But in truth they don't generally deliver benchmark performance. They incur all the real costs a benchmark never does, such as trading, and so just like the active managers they love to denigrate they will typically underperform.

Nothing shameful in that. It's the cost of reality. But there is a deception in the marketing sometimes in terms of the emphasis they place.

(Incidentally I often think it would be fairer if active managers were benchmarked against ETFs or similar passive vehicles rather than theoretical benchmarks. Finance textbooks will tell you a benchmark should be replicable but a theoretical benchmark certainly isn't.)

There's a similar thing with the costs too. Management charges are usuall low. But as the other posters point out there can be trading costs, bid/ask spreads and other costs which are meaningful but don't have to be declared as a management charge. So again the way they are marketed can be a bit deceptive.

Finally, it's also the case that many ETFs suffer from the same 'problem' as investment trusts. They can trade at discounts to NAV and often do, though the spread is typically much tighter because the market making brokers can create or destroy units more easily to take advantage of and smooth out any discrepancies.

This isn't always the case though. ETFs sometimes 'seize up' in terms of liquidity, though it's rare. This is particularly a danger when trading is more active in the ETF than the underlying assets it tracks. So I always shudder a little bit when I see them marketed as having better liquidity than the underlying asset class.

Discounts aren't a huge problem if you know how to deal with them, but people do get caught out. At least with investment trusts the issue is well understood but consumers rarely realise this can be an issue for ETFs too. It's not a coincidence; an ETF shares many similarities of structure with an investment trust.

Having said all of that, they are really useful products. They are often excellent value in terms of fees. But beyond the fact that they are cheap for an asset manager to run (because the brokers and stock exchanges essentially do much of the admin in return for trading revenues) there isn't anything super duper special about them. And I often find the marketing glosses over the slight negatives they do carry.

The fact that their operation is effectively subsidised by the churn of traders does mean that there may be a slight intrinsic cost advantage to buy and hold customers.

They also put a competitive pressure on asset management fees in general, which has been great for consumers.

rated

I like the transparent ETF pricing. It reassures me that I'm not being bilked by insiders.

http://en.wikipedia.org/wiki/2003_mutual_fund_scandal

Glen_Clark

All ETF’s have to be held in Crest, in dematerialised form.
You cannot hold your own ETF certificates as you can with shares in companies - including Investment Trusts.

dunstonh

rated wrote: »

I like the transparent ETF pricing. It reassures me that I'm not being bilked by insiders.

http://en.wikipedia.org/wiki/2003_mutual_fund_scandal

Clean share priced OEICS/UTs are transparent as well. Whilst real time pricing of ETF is a positive. It can also be a negative. Such as events like the flash crash.