Fund or ETF better?

akobata

Some would take the view that if you are holding long term and only rebalance as necessary, then knowing the exact price you are about to buy or sell shouldn't matter, so that is no reason to favour ETFs. But that isn't a reason not hold them or an advantage of holding funds. ETFs can work out much cheaper for platform fees which often charge a percentage of fund values but cap ETFs at a modest annual fee. 

If you are choosing from only established names and nothing exotic i.e. simple global index trackers following the same index, accumulation rather than income, all other things being equal, why may it be preferable or even advisable to choose the fund over the most equivalent ETF? 

 

dunstonh

why may it be preferable or even advisable to choose the fund over the most equivalent ETF? 

Potential issues.
1 - The OEIC/UT version can sometimes be cheaper than the nearest equivalent ETF
2 - No dealing costs on OEIC/UT but there is with ETFs
3 - No concerns over synthetic replication with OEIC/UT but can be with some ETFs
4 - FSCS protection on OEIC/UTs but not ETFs
5 - Liquidity risk can be higher with ETFs.
6 - Spreads can exist on ETFs but not on OEICs.  Can on some UTs but most have got rid of the spread.

Basically, you need a bit more knowledge and research to do with ETFs over OEICs/UTs.  That is why the mass market tends to favour OEICs/UTs.    However, if you are comfortable with the research then there is no harm in using ETFs over OEICs.   Just don't assume in the post unbundled world that the ETF will be better.

El_Torro

I’ve always steered clear of ETFs, which may not be the right thing to do. I’m just more comfortable with the risks involved in holding funds. 

Nothing further to add, dunstonh has already covered it far better than I could have done.

wmb194

dunstonh said:

why may it be preferable or even advisable to choose the fund over the most equivalent ETF? 

Potential issues.
2 - No dealing costs on OEIC/UT but there is with ETFs

This depends on the broker you use e.g., commission free with Freetrade and Trading212.

To add one thing to your list, ETFs can have annoying tax consequences if held outside an Isa or pension e.g., dividends and interest classified as foreign income as most are domiciled in Ireland and the incredibly annoying excess reportable income that you need to keep track of/report and is often hard to discover.

sebtomato

dunstonh said:

why may it be preferable or even advisable to choose the fund over the most equivalent ETF? 

Potential issues.
1 - The OEIC/UT version can sometimes be cheaper than the nearest equivalent ETF
2 - No dealing costs on OEIC/UT but there is with ETFs
3 - No concerns over synthetic replication with OEIC/UT but can be with some ETFs
4 - FSCS protection on OEIC/UTs but not ETFs
5 - Liquidity risk can be higher with ETFs.
6 - Spreads can exist on ETFs but not on OEICs.  Can on some UTs but most have got rid of the spread.

Basically, you need a bit more knowledge and research to do with ETFs over OEICs/UTs.  That is why the mass market tends to favour OEICs/UTs.    However, if you are comfortable with the research then there is no harm in using ETFs over OEICs.   Just don't assume in the post unbundled world that the ETF will be better.

1. I have many index tracker ETFs that are cheaper than the equivalent funds
2. I have no dealing costs for ETFs with Vanguard (as long as I use the bulk service, twice a day)
4. FSCS protection: not sure if it matters. At the end of the day, even if Vanguard (in my case) went bankrupt, their ETFs wouldn't become worthless overnight

dunstonh

1. I have many index tracker ETFs that are cheaper than the equivalent funds
2. I have no dealing costs for ETFs with Vanguard (as long as I use the bulk service, twice a day)
4. FSCS protection: not sure if it matters. At the end of the day, even if Vanguard (in my case) went bankrupt, their ETFs wouldn't become worthless overnight

1 - It can work both ways
2 - Vanguard is a restricted platform and do not offer the best trackers in all areas.  So, if you decide to restrict yourself to Vanguard due to cost, then you may be compromising in other ways.
4 - FSCS matters more if you go off the mainstream or use smaller less capitalised players.   Stay mainstream and the FSCS doesn't really matter.

masonic

Worth adding that FSCS compensation DOES apply to losses suffered as a consequence of your broker/custodian going bust, which is a scenario that is precedented. Also that the cheapest place to hold Vanguard ETFs may not be the Vanguard platform.

MX5huggy

You can buy bits of Fund units but only whole ETF units. So if you are a regular small investor your money maybe out of the market for a period of time before there is enough to buy another ETF unit. 

JohnWinder

Is this relevant?
’ ETFs have an inherent tax efficiency advantage due to their share redemption process (see ETF Taxes). Other things equal, an ETF can be expected to distribute less capital gains than its mutual fund equivalent, often none at all. 

Mutual funds can only rarely eliminate capital gains in the same fashion. The exception is Vanguard's dual-share fund structure, which allows their index funds to be just as tax-efficient as ETFs. In addition, index funds in general have very low turnover, limiting the extent of the problem.’

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

When a mutual fund experiences a nett outflow any capital gains on the fund assets sold is distributed to the remaining fund holders that year, possibly creating an immediate tax liability. Bad.

When someone else sells an ETF it has no impact on other ETF holders because the fund is ‘blind’ to the sale as another individual trading on the stock exchange buys the ETF without involving the fund. Similarly if market makers do the trade.

dunstonh

Mutual funds can only rarely eliminate capital gains in the same fashion. The exception is Vanguard's dual-share fund structure, which allows their index funds to be just as tax-efficient as ETFs. In addition, index funds in general have very low turnover, limiting the extent of the problem.’

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

When a mutual fund experiences a nett outflow any capital gains on the fund assets sold is distributed to the remaining fund holders that year, possibly creating an immediate tax liability. Bad.

Doesn't apply in the UK. Apart from insured funds outside of a pension (e.g. life funds) there is no internal taxation on capital gains.  Taxation on gains is at investor level.  The use of tax wrappers and annual CGT allowances eliminate it as a problem for most.

JohnWinder

Thanks, but I don't follow. The issue I referred to

Doesn't apply in the UK

But the legitimate use of taxation strategies only

...eliminate it as a problem for most.

So it remains a problem for some??