Fund v ETF which is better

Bruckner

In the context of big global index trackers, Vanguard, iShares, Blackrock etc.

All else being equal, why do some investors prefer funds over ETFs?
With funds being priced daily after you have dealt, the price is unknown and in current markets can easily be 5% different from the price when dealt. With ETFs you at least know the price you are buying or selling for.

But lots of investors prefer funds, so what is the big advantage funds offer?

port_of_spain

Knowing the price you deal at is only an advantage if you know which way the price will be moving, which nobody does in reality.

With funds, you can be more confident that you are dealing at a fair price, set once a day by the manager, at more-or-less the actual net asset value of the underlying shares. ("More-or-less" because they have some discretion to vary the fund unit price above or below the NAV.) With ETFs, the trade price might differ significantly from the NAV, and the bid-offer spread can be wider than normal, especially in very volatile markets.

So IMHO, funds are just a bit easier to buy, at a probably fair price, without needing to be too clever about it. So long as the funds invest in very liquid assets (so that includes big global trackers). (Though ETFs are not a good vehicle for illiquid assets, either: something like an investment trust would be better for that.)

OTOH, on some platforms, it's cheaper to hold ETFs. And some more niche investments are only available in ETF form. (And other only in fund form. Or only in investment-trust form.)

Albermarle

Away from a small minority of more experienced investors /advisors , most people invest in funds , mostly unknowingly via the default fund in their pension. The vast majority of the public do not have any idea about things like ETF's.
Even for some more knowledgeable investors , funds are easier to understand than ETF's , especially if you look into the detail about how ETF's actually function behind the scenes.

Linton

Most ETFs do not have corresponding funds and vice versa.   You should decide in what assets you wish to invest first and then determinethe best way of doing so.  Dont start off with saying that you only want to use ETFs, or only funds before you know in what underlying assets you wish to invest.

dunstonh

Given the higher knowledge requirements to use an ETF and the lack of FSCS protection, most consumers stick with the simpler option. Same goes for advisers as the FOS consider ETFs as a higher risk investment in respect of client knowledge and understanding.

The old cost difference in the days of bundled vs unbundled took away the main advantage with ETFs.

bargainhunter888

the FSCS is a bit ambiguous as ive read that it is covered, but then it's not - in reality what is the chances of a provider like Vanguard or Blackrock going bust as they hold value of billions?

would you also elaborate on the knowledge requirements? im new and keen to learn, whether i just lump onto an ETF or look at an open ended fund priced daily.

Thanks 

dunstonh

the FSCS is a bit ambiguous as ive read that it is covered, but then it's not 

it is not ambiguous.  non packaged ETFs are not covered.     They are a direct asset like investment trusts or shares.

would you also elaborate on the knowledge requirements? im new and keen to learn, whether i just lump onto an ETF or look at an open ended fund priced daily.

Replication methods and liquidity.   Some have exposure to highly exotic investments.  Some have counterparty risk.   

ETFs also have dealing costs.

n reality what is the chances of a provider like Vanguard or Blackrock going bust as they hold value of billions?

Low but remember what happened to Lehman Brothers  that was also too big to fail.

Bruckner

dunstonh
Thanks for this information. The FSCS protection you refer to, is that up to £85,000 per eligible person, per firm? So if you have up to £85,000 in total invested in Vanguard funds (not ETFs) then if Vanguard goes bust and for some reason your investments go with it, then you are compensated up to £85,000? Does this apply to all funds, or only UK domiciled funds? 

Once you are over £85,000 invested in any one fund manager, then if FSCS protection is the criteria then you would have to put any additional funds with a different fund manager (e.g. L&G, Black Rock etc).

Are global tracking ETFs such as iShares Core MSCI World UCITS ETF GBP Hedged (Dist) IWDG a complex or exotic investment? Does the hedge constitute a high risk counter-party risk? Is there any alternative global index tracking fund you know of that hedges to GBP?

bowlhead99

Bruckner said:

Are global tracking ETFs such as iShares Core MSCI World UCITS ETF GBP Hedged (Dist) IWDG a complex or exotic investment? Does the hedge constitute a high risk counter-party risk? Is there any alternative global index tracking fund you know of that hedges to GBP?

If you think they're not complex, try to run one...

The hedge is obviously a risk because any hedging strategy is a compromise between cost, effectiveness and reliability. It is an extra risk beyond the market risk of the underlying equities and any other structural complexities. Any returns which are dependent on contracts rather than direct ownership interests (such as currency forward contracts, options, futures or other derivatives) are subject to counterparty risk, of course, beyond the risk of asserting ownership over the direct holdings if there's a failure of any intermediary in the process.

Whether such risk in relation to currency movements or the core assets themselves would be seen by you personally as 'high risk', depends on your parameters and how you choose to measure it. As we don't know what you understand and don't understand about financial instruments and how you measure risk, and what risks you're up for and what risks you're not, it's difficult to comment. If you read the prospectus you will see the risks that they feel they should tell you about, and it's up to you to know how to interpret what consequences may flow from those risks and what other risks might be there but not deemed significant enough to highlight to you.

If you are comfortable that you understand how ETFs work, how their shares are created and cancelled and what might go wrong at each stage of the investing cycle, you could then look at how hedging might be implemented and see what extra risks might be attributed to that. The obvious risk is that the hedge fails when you were hoping it would hold up, or that it fails in a way that reduces your gains or increases your losses compared to what the underlying assets would have returned. If you're using an unhedged share class but the same fund has a hedged class and something goes wrong, there is some risk of cross-class contagion. So some people will steer clear altogether of funds that employ hedging.

Risk is not on or off, but a sliding scale; there are all sorts of obvious and not-so-obvious risks to life and investing. Some you can control and others you can't. When deciding what risks to take, you can filter out the ones you definitely don't want and try to avoid them. For the ones you don't try to avoid, you will need to carry out some rudimentary assessment of how probable they are and whether the potential outcome is acceptable.

Is there any alternative global index tracking fund you know of that hedges to GBP?

As an example rather than a recommendation, DWS (part of DB) have one in their x-trackers ETF product range.

bargainhunter888

dunstonh said:

the FSCS is a bit ambiguous as ive read that it is covered, but then it's not 

it is not ambiguous.  non packaged ETFs are not covered.     They are a direct asset like investment trusts or shares.

would you also elaborate on the knowledge requirements? im new and keen to learn, whether i just lump onto an ETF or look at an open ended fund priced daily.

Replication methods and liquidity.   Some have exposure to highly exotic investments.  Some have counterparty risk.   

ETFs also have dealing costs.

n reality what is the chances of a provider like Vanguard or Blackrock going bust as they hold value of billions?

Low but remember what happened to Lehman Brothers  that was also too big to fail.

What is a non packaged vs a packaged etf? Would holding a fund be the same scenario without dealing costs but incurring a higher management fee

dunstonh

What is a non packaged vs a packaged etf? Would holding a fund be the same scenario without dealing costs but incurring a higher management fee

Don't go there.  Indeed, I am not sure if they still exist post 2013 unbundling.   They were a way for ITs or ETFs to be built into a product and sold packaged with additional fees on top. Very niche all those years ago.    Actually, come to think of it they do still exist in a different way.  Just referred to as robo-guidance or robo-advice nowadays.  Most of them use index trackers and some use ETFs.  So, that is a form of packaging.

 The FSCS protection you refer to, is that up to £85,000 per eligible person, per firm? So if you have up to £85,000 in total invested in Vanguard funds (not ETFs) then if Vanguard goes bust and for some reason your investments go with it, then you are compensated up to £85,000? Does this apply to all funds, or only UK domiciled funds? 

For UT/OEICs it is £85k per fund house.   So, if you have £170k with £85k in Vanguard funds and £85k in HSBC funds, then you would get FSCS protection on each.    Offshore funds get no FSCS protection.  However, there may be some protection in the country they are domiciled in.  

Life funds and insured pension funds (the type you see on stakeholder pensions and many personal pensions) get 100% FSCS protection with no upper limit.  Although it is a grey area if the fund is externally managed by a third party fund house rather than the insurer - so much so that you see the insurers offering a different opinion on this.  Although that can be down to the mirroring method used.

ETFs and ITs get no FSCS protection

Are global tracking ETFs such as iShares Core MSCI World UCITS ETF GBP Hedged (Dist) IWDG a complex or exotic investment? Does the hedge constitute a high risk counter-party risk? Is there any alternative global index tracking fund you know of that hedges to GBP?

To be honest, if you cannot work that out for yourself then you should not be investing in them.    Those with knowledge will make the risk vs reward decision knowing all the risks that may or may not exist on a particular investment.     Those that cannot tell should avoid using that type of investment.