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Why do people with the knowledge seem to invest more in ETFs?
Comments
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ETFs and funds have the same mechanism to avoid passing costs into existing holders... Unit pricing.
The difference is that ETFs have an additional layer of complexity that allows Authorised Market Participants to offer fund units for sale/purchase on an exchange. They are also responsible for making sure the price doesn't deviate too much from fair market value.
I'd say those processes make ETFs less transparent but it's not something an investor should be concerned about.
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That is a misunderstanding. Creating and redeeming units costs money. That cost should not be born by long term investors in a fund. All funds have (or should have) a mechanism to prevent that happening.
Vanguard ETFs have a dilution levy on the Market Participants (see the prospectus).
European OEICs and Unit Trusts use swing pricing to combat dilution. Vanguard tried dilution levies, which it uses with its US mutual funds. It found that many European platforms do not support dual pricing. It also found it difficult to convince European customers that the dilution levy was paid into the fund, and not into Vanguard's pocket. Swing pricing is more costly to implement than a dilution levy. It also hides the cost of creating and redeeming units. That gives the customer the impression that trading is free, which it is not.
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Apparently ISA millionaires have a strong preference for OIECs, not ETFs.
80% OEICs
5% ITs
4.4% ETFs
3.6% UK shares
1.5% international shares
1.3% cash
https://www.fidelity.co.uk/markets-insights/investing-ideas/funds/how-to-invest-like-an-isa-millionaire/3 -
Is that because these ISAs were transfers from PEPs, and from the days when ETFs were difficult for UK investors to access? It does, after all, take time to get £1m into an ISA.
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I think it's because those are Fidelity's figures, and while they do allow their investors to have ETFs on the platform, it's geared around their own fund offerings - they list the "Top 10 ISA millionaire funds", and 6 are from Fidelity (the other 4 from L&G). That would not be the breakdown of funds on other platforms.
I think the accurate thing to say would be "ISA millionaires on Fidelity's platform have a strong preference for Fidelity and L&G OIECs, not ETFs".
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II's numbers are much different:
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I'm not defending the position, merely articulating it.
Personal Responsibility - Sad but True
Sometimes.... I am like a dog with a bone0 -
They are very different, but ii is useless at categorising investments. In my quarterly statement, they told me my ISA had 38% "equities" and 62% "unit trusts", but 0% "ETFs". In fact, it had about 52% ETFs, 45% OEICs, and 7% investment trusts. I cannot work out how they managed to re-categorise it all to get their numbers.
Their numbers on that page are inconsistent too - ii ISA millionaires hold 35.11% as equities, but their female ISA millionaires hold 47.09% and male 50.28%! (I suppose that could mean that they don't know the gender of the majority, and that majority holds far less as "equities", whatever they're using that word to mean here. But it seems unlikely that the "not known" category would be that far below both the others).
I wouldn't read anything at all into the ii figures. It looks like a rush job by someone handed some figures with no idea how they were produced; and since they can't get the quarterly statements right on the subject, I think the figures themselves are junk.
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HL is at least as bad. It believed that my portfolio of 100% gilts was 100% equities. It believed that 36.3% of my gilts were UK equities. It believed that the remaining gilts where equities with location "non-classified".
I transferred these gilts to Scottish Widows, which believes that I have lost over £43 million on that investment.
Crazy stuff.
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For what it's worth, with a non ETF type fund - one that has., for example, a daily valuation point, any fund share creations and cancellations are typically undertaken in a consolidated level - depending on the fund manager and supporting technology - across an entire fund (covering all share classes). This box management mean that in the normal scheme of things - where flows allow, incoming investors fund share demands are met from fund shares that outgoing investors have redeemed - without the manager having to revert to the markets
This results in any fund level creations/redemptions being only at a net fund position - with a resultant reduction on the fund’s underlying dealing costs. - and any potential dilution of the fund, which the fund manager may have to address.
The position with ETFs appears more complex, with the use of multiple Authorized Participants(APs) that operate intraday with the fund managers, this opportunity to offset inflows and outflows is much more limited. The result being that the investor will typically be subject to a dealing cost to reflect the associated bundling/unbundling of fund shares into/out of their underlying assets by the AP. This cost being contained in the bid offer spread of the given fund shares being bought or sold, which itself can be variable due to the liquidity of the underlying assets etc.
I’m guessing that this aspect of a fund’s operation (and the associated difference between ETF and non-ETF funds) isn’t that important for a retail investor who is looking for a long term fund investment – especially in comparison to on-going platform and fund charges.As it happens, for anyone who is interested in such things, the FCA has just published a policy statement on fund liquidity management, which covers dilution techniques in more detail https://www.fca.org.uk/publication/policy/ps26-17.pdf
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