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ETFs
Comments
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ETFs are not a type of OEIC. ETFs are cheaper to run not only because the fund manager does not have to manage buying and selling units. That is managed by the stock exchange, market makers and brokers. The fund manager also does not have to manage the creation and redemption of units, because that is handled by the Authorised Participants.
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ETFs have several differences from an end-investor perspective too, some of which have been discussed up-thread. It is worth investors who are only familiar with OEICs and UTs doing a little research before diving into ETF portfolios.
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No, really, in our world of UK retail investors, ETFs are a subset of "OEICs" (i.e. Investment companies with variable capital) funds. By way of example, using the Vanguard funds discussed in the thread if we look at the "OEIC" Vanguard ESG Developed Europe Index Fund and the Vanguard ESG Developed Europe All Cap UCITS ETF. The first is in
VANGUARD INVESTMENT SERIES PLC An investment company with variable capital constituted as an umbrella fund with segregated liability between sub-funds under the laws of Ireland authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (as amended) (https://fund-docs.vanguard.com/ie00b76vtl96-en.pdf)
And the ETF is in:
VANGUARD FUNDS PLC An investment company with variable capital constituted as an umbrella fund with segregated liability between Funds and incorporated with limited liability under the laws of Ireland under registration number 499158 and authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as may be amended
So there we have it - both are "OEICs" (i.e. Investment companies with variable capital) - it's just that the ETF subset, as it name suggest, is bought and sold(traded) via (stock) exchanges rather than directly through fund managers or via supermarket fund platforms - such as AJ Bell or Hargreaves Lansdown.
Hope that helps demystify what ETFs are here – as variations of a standard retail fund arrangement rather than some other investment beast. As Vanguard itself says “So what’s the difference? It comes down to two things: the way they're traded (bought and sold) and fees.”
https://www.vanguardinvestor.co.uk/investing-explained/what-are-etfs
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OEIC is a UK-domiciled legal structure, while ETF defines a fund's trading mechanism. For Vanguard ETFs, the legal entity is a PLC not an OEIC. Other ETFs are Luxembourg SICAVs. While an ETF that is an OEIC is theoretically possible, none actually exist due to historic taxation inefficiencies. That means for the time being all OEICs are not ETFs - they don't trade on an exchange and you need to buy and sell units via the fund house, typically at NAV in a once a day pricing event. Until and unless a fund house releases a UK domiciled ETF and structures it as an OEIC, the Venn diagram of OEIC / ETF has no overlap.
So it is both wrong and potentially harmful to suggest ETFs are a subset of OEICs. It is like saying silver is a subset of coins. The coins people have will almost certainly not be made of silver, and there are many items made of silver that are not coins.
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Couple of points on ETFs.
- Vanguard's new LS funds seem to aim to match global indices on a market cap basis in the desired risk proportion, eg. LS Global 60 aims for 60% global equity, with the remainder in bonds. Looking at the underlying holdings, there's many of them. I am wondering why this is, given that the objective can be easily achieved if they'd had just, say, VWRP/ VAGS in the allocated proportions. Any clues?
- Looking at thematic ETFs focussed on AI, I see there's quite a few available, from a number of providers. They all seem to track a different AI related index, and there is some difference, not massive, in the underlying holdings. How might one go about choosing an AI-focussed ETF in these circumstances?
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"Vanguard's new LS funds seem to aim to match global indices on a market cap basis in the desired risk proportion, eg. LS Global 60 aims for 60% global equity, with the remainder in bonds. Looking at the underlying holdings, there's many of them. I am wondering why this is, given that the objective can be easily achieved if they'd had just, say, VWRP/ VAGS in the allocated proportions. Any clues?"
Part of this will come down to rules about concentration in a portfolio. For OEICs it's something like 10% maximum per holding and 40% maximum for holdings >5%, which has set the precedent for the UK LifeStrategy funds. The ETF mirrors are probably just matching the OEICs. Though the aren't even listed in the UK market IIRC.
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On your thematic front, what are the reasons for going with a particular theme? If you know what they are, then go with the fund that best meets those reasons, or all other things being equal (which they won't be), the cheapest. I wouldn't touch that theme with a barge-pole personally now so I can't really help.
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The term OEIC in quotes was used with a qualifier that it meant Investment companies with variable capital (ICVC) The thread also referred to “OEICs are not UK domiciled” and “Irish OEICs” when referring to non-ETFs. As such is probably not worthwhile getting too hung up on the UK specifics in this context.
The example given was of an Irish ETF being an Irish “OEIC” (ie. ICVC). It’s similar in Luxembourg too – ETFs are just a type of SICAV “OEIC” (ie ICVC) fund (eg (
So hope that clears things up – from the UK retail investor point of view – that’s us? – ETFs are just a type of “OEICS” (i.e. Investment companies with variable capital). The key aspects to make them work as collective investments for retail customers - such as : how they are governed, their depositary oversight, their segregation of assets, compliance with regulations and even (local) legal structures are common. Seeing them as something significantly different to other retail funds just causes confusion.
Even the ETFs’ feature of being bought and sold on exchanges can be of limited difference to retail investors that use AJ Bell and the like, especially when these fund investments are intended as long term. However, trading ETFs can have some undesirable outcomes so I would caution against placing any stop loss deals – if these are still offered.
Finally, I do recall this (it took a while to find again) UK ETF (https://www.rns-pdf.londonstockexchange.com/rns/6516X_1-2019-4-30.pdf) , which was structured as a OEIC – no quotes needed.
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Well if you are using "OEIC" to mean any open-ended fund, then you are right that ETFs are open-ended. They create and destroy units whenever there are net capital inflows or outflows, sharing this variable capital arrangement with actual OEICs and Unit Trusts (unlike Investment Trusts, which have fixed pools of capital).
However, the confusion arises here because OEIC is not a generic descriptive term. It is a legally defined corporate structure created under the UK's OEIC Regulations 2001. Referring to a Luxembourg SICAV or an Irish PLC as an "Irish OEIC" / "Luxembourg OEIC" is legally and technically incorrect. Even with the quotation marks, using a strictly defined term to mean "that kind of thing" is what created the confusion in this thread.
Thank you for unearthing that historic example of an OEIC ETF! That perfectly illustrates that "OEIC" (the legal structure) and "ETF" (the trading mechanism) can intersect. But today's ETFs invariably use other legal structures, including those mentioned above.
Ultimately I agree with the broader point that investors shouldn't fear ETFs or view them as alien compared to the OEICs/UTs they might be more familiar with. Under the hood, the underlying assets and general operations are largely similar. But there are aspects of them being offshore funds and having a different trading mechanism that they ought to appreciate so as not to be blindsided by them after investing (for example, we regularly see worried posts from investors who learned ETFs aren't covered by the FSCS protection for investments, not to mention ERI catching many out).
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Or to put it more succinctly, ETFs are not "a subset of OEICs" no matter how many times @UncleTomCobley posts that they are. 😇
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