Fund or ETF better?

masonic

JohnWinder said:

But I wasn't talking about tax 'internal to the fund', I was trying to talk about taxation of the individual investor as a result of the fund's payouts, so I thought she may not have understood my description.

And then she hinted that if an investor wasn't saved by a tax wrapper and their CGT allowance, they may still have the problem I was pointing out exists in other jurisdictions and might exist in UK.

The use of tax wrappers and annual CGT allowances eliminate it as a problem for most.

I think this is the source of the confusion. It followed the comment that there is no internal taxation at the fund level, rather it is incurred by the transacting investor.

JohnWinder

So if you have a large unsheltered pot you can arrange to always realise up to £12300/year in net gains and re-invest immediately in something similar but not identical.

That's a clever tax strategy; nice.

Very few people are going to average more than £12300/year net gains in unsheltered accounts.

You must see how I feel that is irrelevant to whether funds (not etf's) are different from etf, given the topic title and my original question.

masonic

JohnWinder said:

I'm willing, although hesitant about accepting one opinion particularly if it's expressed in an apparently contradictory way. But there you are, I'm not the soul of clarity myself sometimes.

Three opinions so far, two of which have been expressed quite clearly.

Linton

JohnWinder said:

IanManc said:

JohnWinder said:

No I can't. When I raised the matter I referred to a USA source, relevant to USA (?elsewhere), and I asked 'is this relevant?' by which I meant 'to readers', in UK or elsewhere come to that. Sorry if that was unclear.

And @dunstonh replied very clearly, saying "Doesn't apply in the UK".

Indeed she did. And then pointed out that there is no internal taxation on capital gains in the funds we are talking about.

Apart from insured funds outside of a pension (e.g. life funds) there is no internal taxation on capital gains.

But I wasn't talking about tax 'internal to the fund', I was trying to talk about taxation of the individual investor as a result of the fund's payouts, so I thought she may not have understood my description.

And then she hinted that if an investor wasn't saved by a tax wrapper and their CGT allowance, they may still have the problem I was pointing out exists in other jurisdictions and might exist in UK.

The use of tax wrappers and annual CGT allowances eliminate it as a problem for most.

You seemed to be talking about taxation of investors on the internal operations of a fund.  With the given niche exception (about which I know nothing) there isn't any.  All taxation arises directly from the interaction between the investor and the fund.  And with the amount of money and the type of investments used by most investors CGT can be avoided completely.

adindas

akobata said:

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?

Fund or ETF better?

ETF is Exchange Traded Funds. So it is also a fund

But I fully believe what you mean you mean here is Mutual Tracker Fund (or OEIC in the UK) vs ETFs.

I personally prefer ETF as it is more flexible and I could trade it like a normal stock. Also in vast majority of cases especially for US funds the fees are cheaper with ETF. The few exceptions are Vanguard own funds where you might find OEIC version is similar or slightly cheaper.

But to get this benefit you will need to use a platform which does not charge you share dealing / transaction fees. You could trade it any time you want to during the stock market opening hours and it costs you almost nothing.

If you search there are a lot of articles comparing the two competing option. This is just an example.

https://www.ftadviser.com/2016/04/05/training/cpd-tracker/virtues-of-etfs-compared-with-oeics-AWBW9rihYOhvHVYYOQxpAI/article.html?page=1

JohnWinder

Not wishing to drag this on for more than another dozen or so posts, but is it true that for funds (not efts) that hold mostly stocks, or only stocks, the annual/semi-annual/whatever payments that investors receive from the funds are referred to only as 'dividends'?

Linton

JohnWinder said:

Not wishing to drag this on for more than another dozen or so posts, but is it true that for funds (not efts) that hold mostly stocks, or only stocks, the annual/semi-annual/whatever payments that investors receive from the funds are referred to only as 'dividends'?

Yes, fund payments derived from equity are called dividends and taxed in the same way as dividends from individual company shares.  If the money was generated from bonds they are "interest" and taxed in the same way as savings interest.

JohnWinder

Thanks. Many all-equity funds hold some cash; were that to generate some interest the interest would be paid to investors lumped together with the stocks’ dividends, and both called ‘dividends’, I’ll assume.
And some/?all funds of mostly equities but with some bonds, will pay investors something which is only called ‘dividends’ even though some of the payments is interest from bonds, I’ll assume.
If that’s right, why couldn’t there be a component of the ‘dividend’ which is actually realised capital gains (assume the investor has neither sold nor bought during the year)?  Or are the components of the ‘dividends’ itemised for the information of the investor?

Linton

JohnWinder said:

Thanks. Many all-equity funds hold some cash; were that to generate some interest the interest would be paid to investors lumped together with the stocks’ dividends, and both called ‘dividends’, I’ll assume.
And some/?all funds of mostly equities but with some bonds, will pay investors something which is only called ‘dividends’ even though some of the payments is interest from bonds, I’ll assume.
If that’s right, why couldn’t there be a component of the ‘dividend’ which is actually realised capital gains (assume the investor has neither sold nor bought during the year)?  Or are the components of the ‘dividends’ itemised for the information of the investor?

Correct, a fund either pays dividends or interest, not a bit of both.  In case of doubt the fund documentation should specify what the pay.  In complex cases perhaps they would need to agree it with HMRC.

There are strict rules about what can be paid out as an OIEC/UT dividend.  A fund must pay out all the dividends it receives (INC) or reinvest all (ACC).  It cannot pay out anything else.  

masonic

JohnWinder said:

Thanks. Many all-equity funds hold some cash; were that to generate some interest the interest would be paid to investors lumped together with the stocks’ dividends, and both called ‘dividends’, I’ll assume.
And some/?all funds of mostly equities but with some bonds, will pay investors something which is only called ‘dividends’ even though some of the payments is interest from bonds, I’ll assume.
If that’s right, why couldn’t there be a component of the ‘dividend’ which is actually realised capital gains (assume the investor has neither sold nor bought during the year)?  Or are the components of the ‘dividends’ itemised for the information of the investor?

The threshold for funds is 40% equities. At or above this, all of the distribution is a dividend, below it interest. Investment trusts (company shares) always distribute dividends regardless of how they generate their profits. This can be useful if wishing to hold fixed interest outside of a tax wrapper where you have exhausted your personal allowance and personal savings allowance. You may pay for the privilege through higher ongoing charges however. Also, ITs normally trade at a premium/discount to NAV.