Investment Trust Vs OEICs Vs ETFs

El_Selb

I'm trying to understand the merits of each and why I should opt for or against them. Here's my understanding -

OEICs/UTs - Costlier charges. Trade at NAV. Unlisted. More common than ITs & ETFs?

Investment Trusts - Can trade at premium/discount, so investors can look for value - does this mean ITs are more suitable for a more sophisticated/active private investor? They can be harder to access through platform providers. Listed. Riskier than OEICs & ETFs.

ETFs - Generally track indexes (or indices?!) or a basket of assets. Slightly confused by this ITs & OEICs could be said to track a basket of assets couldnt they...but maybe the basket of assets are similarly grouped - in the same sector etc? ETFs have lower charges. Listed on the stock market.

Is the above correct and what vital info have I missed?

I'm still not quire sure when I should be investing in each of the 3. Is it just better to go with ETFs and ITs due to the lower charges?

Drp8713

Why don't you have a look here:


http://news.fool.co.uk/Your-Money/guides/Unit-Trusts-And-OEICs.aspx
http://news.fool.co.uk/Your-Money/guides/Investment-Trusts.aspx
http://news.fool.co.uk/Your-Money/guides/Exchange-Traded-Funds.aspx

kidmugsy

I've seen advice not to buy ETFs of corporate bonds as they might be exposed to serious liquidity problems in the event of a bond crash. I've seen no comparable warnings about equity ETFs in mature markets. Lord knows about Emerging Markets.

I've been happy to own ITs in the long ago. The great advantage of cheap "funds" such as Vanguard's is that they are cheap. How they compare with Vanguard's own ETFs I don't know.


If I were about to plunge a lot of cash into the markets I think I might combine (i) Equity ETFs/Vanguard "funds" for large companies in mature markets, (ii) Direct holding of sovereign debt (effectively, buying a gilt), (iii) ITs for more specialist equity or debt investment, and (iv) Gold coins of the realm (e.g. sovereigns) to hold in a safety deposit. What else? Maybe REITS?

brendon

El_Selb wrote: »

Investment Trusts - Can trade at premium/discount, so investors can look for value - does this mean ITs are more suitable for a more sophisticated/active private investor?

An Investment Trust is just another company, like BP or Tesco. Except that the business's objective is to invest in a specific area, for its shareholders. So, like BP or Tesco, it could be undervalued or overvalued at any point in time. An OEIC, on the other hand, is valued on the assets that it holds.

Roughly speaking, when you sell your investment in an OEIC, that fund sells the equivalent amount of its assets in order to pay you. With an investment trust, you are not dealing directly with the company but other shareholders. Hence, there is an added risk in terms of liquidity. The investment trust may also have debt, etc, like other companies.

An ETF is sort of in-between in that there is a primary market and a secondary market. When you buy into an ETF, you are either buying an existing share from another 'shareholder' or a share from a 'sponsor' who buys the shares on the primary market, directly from the fund.

atush

Actually, I think you have that wrong.

Oeics have to sell assets when shareholders leave. As they have to pay the shareholder.

ITs dont, as they have leverage, and dont have to sell anything to pay the shareholder, the one who buys the share (discount, premium or not) does so.

Linton

OEICs/UTs are not necessarily higher cost than other options. They were in the past when their charges included commission for advisors and platform fees. These are now unbundled, at least for new purchases.

There is a much wider choice of OEICs than ITs, 3000+ vs 382 shown on trustnet.

There are roughly the same number of ETFs as OEICs/UTs but many of these seem highly "technical" or based on obscure indices. OEICs seem more user friendly for the average investor. Perhaps I am being old fashioned but I am very suspicious of ETFs. Some of them dont hold the actual assets whose price they follow but rather depend on financial instruments to duplicate the index, a practice which I fear could add significant risk.

Totton

Oeics have to sell assets when shareholders leave. As they have to pay the shareholder.

I was interested in this claim as I have read that platform, brokers etc will actually offset buys and sells within their own environments before placing orders with fund companies. This appears a way for such enterprises to take an extra slice of the cake. In reality I have no idea how it works or if it is correct, food for thought though.

brendon

Linton wrote: »

Perhaps I am being old fashioned but I am very suspicious of ETFs. Some of them dont hold the actual assets whose price they follow but rather depend on financial instruments to duplicate the index, a practice which I fear could add significant risk.

I think European rules limit your exposure to 10% for a synthetic ETF. Basically, the fund holds an amount of assets that is within 10% of what you invest, and then swaps the returns on those assets for the returns that you actually want. So, if the bank failed to pay up on its swaps, you'll lose up to 10% of the NAV.

My concern is that these ETFs are being used to package up bad assets that the banks don't want on their books, and offload them to retail investors. No evidence for that, of course.

atush

Totton wrote: »

I was interested in this claim as I have read that platform, brokers etc will actually offset buys and sells within their own environments before placing orders with fund companies. This appears a way for such enterprises to take an extra slice of the cake. In reality I have no idea how it works or if it is correct, food for thought though.

While in general some brokers can seek to keep sales 'in house' if they like (and your point on fees is a good one) the fact remains that those buying provide the funds to those selling Always with ITs.

If the Market drops 20% and everyone is selling, OEICS have to sell assets, and ITs the price falls with sentiment (but the underlying assets remain).