Difference between Passive Index ETF's and funds for a buy and hold retail investor

christophercharles

Hello

Im new to investing and have tried to do my own research as much as I can, but i cannot for the life of me understand the benefits of investing in an index ETF's Vs an Index fund with both tracking the same Index.

As I understand it, an ETF can be traded like shares and bought/sold anytime, a Fund can only be bought/sold at the end of the trading day, so the price for a fund might be different to what you expect it to be and ETF if say, you decided to sell at 12pm.

I also understand that for many investing platforms like Hl and vanguard there is a fee for dealing into/selling passive ETF's (£11.95 and £7.50 respectively) but its free for many passive funds. In addition there are platform fees for both, but in many cases the fees for index tracker funds are less than index ETF's on for example on Vanguard fees can vary to as low as 0.04%

I have read that ETF's have less "taxable events" than funds. I dont understand what that means or if it has any relevence given I intend to invest into a SIPP and Stocks and shares ISA only?.

I intend to passively invest into the index trackers FTSE100 and S&P500 (and some into a Vanguard global so I can diversify) equities only (not bonds) and follow the buy and hold principle i.e. invest now, leave it for at least 7-10+ years (longer with the SIPP) and then take some out if needed. There are both ETF and Fund trackers to do this. In this case (barring I am unlucky enough to cash out in the middle of an extremely volatile period) i'm not sure how important the ETF advantage of selling at the real time minute's price Vs selling a fund at the end of the day is going to be?

In a nutshell, spending £11.95 / 7.50 just to buy and then sell an ETF, plus the higher (Vanguard) management costs compared to free dealing/selling of funds and lower platform fees means funds are a more economical option?

So why do people still invest into an ETF? what am I missing?

I only intend to use the Vanguard and Hargreaves Lansdown platforms

Grateful for any advice

RacingDriver

Some platforms cap fees for ETFs but not for funds

masonic

One big advantage of ETFs you are missing is that investment platforms treat them in the same way as shares and may cap their platoform fee on ETF investments. For example, if you hold £100k in ETFs at Hargreaves Lansdown, this is capped at £45 per year, whereas funds would be charged at 0.45% for the full amount (£450 per year).

ChilliBob

If its not within a tax wrapper then ETFS have the added complication of Ecxess Reportable Income.

Tax wrapper regardless there is the spread to consider with an ETF which you don't get with an OEIC. If the ETF is massive this probably isn't a huge concern. 

So, if in an ISA say, and its a big global fund, there's probably very little to choose - so cost, both OCF and platform charges will probably be the deciding factor. 

christophercharles

Thank you for your comments. So in the end does it just come down to the difference in platform fees from the individual provider? This i can calculate and adjust according to how much I invest.

To be honest my concern was that in picking the index ETF's VS index funds I was misunderstanding how they work and the performance of that ETF/fund, so I was going to earn less if I chose an ETF/fund which invested in the same index because there was a differnece in tax/performance (and any external benefits) outside of the platform charges..

ChilliBob

With etfs the domicile does make a difference, for example if you choose Dublin I believe you will end up with more in your pocket than if you choose Luxembourg. It's all to do with, iirc, how dividends are taxed from the US and the withholding tax agreements etc. Theres more out there on Moneyvator.com about this.

In fact their 6 part guide in choosing index funds and differences in ETFS is very good, their whole beginner section is well worth a read 

christophercharles

ChilliBob said:

With etfs the domicile does make a difference, for example if you choose Dublin I believe you will end up with more in your pocket than if you choose Luxembourg. It's all to do with, iirc, how dividends are taxed from the US and the withholding tax agreements etc. Theres more out there on Moneyvator.com about this.

In fact their 6 part guide in choosing index funds and differences in ETFS is very good, their whole beginner section is well worth a read 

Thanks.I've never heard of moneyvator. A lot of my info comes from investopedia which is US focused, I'll definetly give it a good read.

ColdIron

It's Monevator, no Y, to aid you in your googling

https://monevator.com/

george4064

Worth noting that with many platforms you can pay a much lower dealing fee when buying ETFs by making use of their regular investment service, for example AJ Bell it’s only £1.50 per regular investment trade.

masonic

george4064 said:

Worth noting that with many platforms you can pay a much lower dealing fee when buying ETFs by making use of their regular investment service, for example AJ Bell it’s only £1.50 per regular investment trade.

...and so does the OP's preferred platform, Hargreaves Lansdown. This service can usually be manipulated to make a one-off lump sum investment by setting up for a month and then cancelling.

ChilliBob said:

With etfs the domicile does make a difference, for example if you choose Dublin I believe you will end up with more in your pocket than if you choose Luxembourg.

Vanguard domiciles its ETFs in Ireland.

EdSwippet

christophercharles said:
Thanks.I've never heard of moneyvator. A lot of my info comes from investopedia which is US focused, ...

On the latter, remember that US sites offer US-specific information that may well simply not apply to US investors.

For example, you said "I have read that ETF's have less "taxable events" than funds." US domiciled funds are required by regulation to distribute both dividends and (most) capital gains realised internally by the fund. For assorted technical reasons, ETFs can operate in this environment slightly more tax-efficiently than funds. However, UK and EU domiciled funds do not operate under US fund regulations. That means we can have access to "accumulating" funds and ETFs, where US investors generally cannot, our funds and ETFs never distribute capital gains, and that for UK investors, funds and ETFs are equivalently tax-efficient.

Other US-specific things that don't apply in the UK include: tax-loss harvesting; capital gains tax rules (specific share, FIFO, LIFO); and IRA and 401k accounts.