ETFs/offshore index trackers, no FSCS cover?

luckylizard

Hi everyone, have been doing some research online into the benefits of using index trackers as opposed to managed funds and wondered if I'm right in thinking that ETF trackers and 'offshore' trackers (eg Vanguard's Ireland-domiciled trackers) are not covered by the UK's Financial Services Compensation Scheme?

Seems the widest variety of trackers is available through ETFs but I'm slightly wary if they're not covered (even though the risk of default is small).

masonic

Very few are domiciled within the UK. You would still be protected in the event of platform default/fraud, which is perhaps a more likely scenario.

Ryan_Futuristics

luckylizard wrote: »

Hi everyone, have been doing some research online into the benefits of using index trackers as opposed to managed funds

Just on this ... it's a slightly more nuanced issue than some bloggers would have you believe

People cling to certainties, but when you look deeper there aren't many ... There is certainly a benefit to lower fund fees, but anything beyond that has to be assessed a bit more objectively

Good balanced article
http://investing.covestor.com/2014/09/active-vs-passive




I think offshore funds are covered by the FCA (if they were sold to you here) but not the FSCS ... But always anaylse ETFs carefully - many (especially overseas, or targeting more niche sectors) can still be quite expensive

Management fees on passive ETFs can be as high as actives, and look out for hefty bid-spread costs and dealing fees ... I'd tend to recommend sticking with cheap OEICs until your portfolio's in the £100k-1m range

Depends how you're investing of course, but rebalancing a few funds annually, those fees can quickly obliterate that 0.3% annual saving you made choosing a passive fund over an active

luckylizard

Ryan_Futuristics wrote: »

Depends how you're investing of course, but rebalancing a few funds annually, those fees can quickly obliterate that 0.3% annual saving you made choosing a passive fund over an active

I'd forgotten to factor that in. I usually rebalance once a year and with 10+ funds, that's potentially 20 trades. (I'm currently running mixture of active managed (UK mainly) and passive L&G trackers, so hedging my bets in the active/passive argument.)

masonic

Depending on how much you are investing regularly, you may be able to rebalance by simply topping up what you are becoming underweight in.

I currently use a mixture of ETFs and investment trusts (mostly) in my portfolio. However, I used funds in the beginning when my portfolio was small. Having the ability to set limit orders to catch dips in the market is another advantage of ETFs and could more than compensate for the trading costs.

Ryan_Futuristics

Yeah, I'd consider ETFs either for lump-summing and staying long (which is what I basically do with Investment Trusts), or when you've got a fairly large portfolio, where a £10 dealing charge isn't going to knock off more than 0.1% value

The L&G trackers are perfect for broad market exposure (and there's a nice HSBC one for the FTSE 250) - negligible fees, no bid-spreads, and (with some brokers) free fund dealing ... And I think PR nightmare open active funds have had recently has seen many of them drop their fees to basically the level trackers were shortly before Vanguard got here

A lot of the ETF narrative is coming from the US, where fund fees are often higher, active management generally struggles more, and where they've got an infinitely wider choice of ETFs by region, investment style, smart-beta, etc

masonic

Choice of platform will also impact this - I can buy for £1.50 if I'm happy for the order to go through on a set day of the month and I have £20 of trading credit that I have to use or lose each quarter.

The cheaper platforms will allow real time trading for £5-6. One might also be steered more towards ETFs and ITs if the platform charges for them are lower, or if OEICs also attract the same trading fees.