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Confused - Investment trusts vs Funds vs ETF
Comments
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Surely FSCS is a red herring here? The value of the holdings in a DC pension pot, a SIPP an ISA or directly held will all rise and fall with markets regardless of the FSCS protection on the body that is holding them.
Its not a red herring but it is a risk assessment. Especially if the OP goes off investing in synthetic ETFs or obscure ITs which go on to fail.
In the case of pension funds, the providers are required to carry out due diligence before offering them. So, it protects a novice from making a disastrous mistake. They can still make allocation mistakes but the chances of their fund going under are lower.
An experienced investor who is less likely to make mistakes may devalue the importance of the FSCS. And quite right. With real knowledge comes an understanding of the pros and cons allowing informed decisions to be made. However, we see billions of pounds being lost by people making bad investment decisions in assets with no FSCS protection. So, for an inexperienced investor, it should not be written off as irrelevant.I agree. Wholly confusing post for the OP who could read that (what you were responding to) and get the wrong end of the stick about whats protected.
The question asked by the OP was:
"So what I'm asking is what's the difference between these SIPP investments "
My answer matched the question. There are other differences but short of writing pages of text, the FSCS protection is one of the main differences.0 -
The OP should reasearch in detail but there is no need whatsoever to be scared of ITs or ETFs.
Funds - these use your money to invest in a range of other companies, I.e they allow you to buy one fund but in fact gain exposure to a wide range of other companies. The Key point about finds is they are Open Ended. I.e if they receive more money in they buy more assets. If people sell the fund they have to sell assets. The fund price should correlate closely with the Net Asset Value of the underlying investments. They are usually priced once a day. The management of the fund is payed for by a management charge, funds can be passively managed, which typically leads to a low management charge, or actively managed which cost more, sometimes much more (you are paying for the asset picking skills of the managers).
ITs - These are compainies in their own right, they raise a load of money up front and use this money (like funds) to invest in a range of assets. The initial money raised forms the capital of the company, they are closed ended. If a lot of people buy the IT the price will go up but they won’t buy any more assets, and visa verca. The stock price can be more or less than the NAV. This closed ended nature can be a big advantage with certain illiquid asset types as it prevents situations like Woodford has had recently. ITs are almost always actively managed, they can borrow money to invest in assets (gearing), this adds risk but can increase return. Like other shares the prices change by the minute.
ETFs - are TYPICALLY open ended investments but which are traded on the stock market and so the prices change by the minute. Many ETFs are passively managed index trackers with low charges and so can be a cheap way to get exposure to an index.
This is just a very quick layman’s view of some of the key differences. But like anything else you need to research a particular fund/IT/ETF to ensure it does what you want. Note that most platforms charge differently for funds and IT/ETF. ITs can be more risky than funds due to gearing and NAV discounts and premiums but not all ITs use much gearing and you can see an ITs premium/discount history.0 -
I use AJ Bell to hold ETFs, but for funds they charge more, so if I wanted to hold those I might look elsewhere. (I think Interactive Investor may be cheaper for funds?)0
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Thanks all for the replies, this is very useful. I will likely continue to invest in Vanguard lifestrategy for my pension as well as ISA0
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The question asked by the OP was:
"So what I'm asking is what's the difference between these SIPP investments "
My answer matched the question. There are other differences but short of writing pages of text, the FSCS protection is one of the main differences.
But in reality its a trivial difference that is extremely unlikely to ever be needed and I think its confusing to even mention it because to an investor as inexperienced as the OP it could be misinterpreted as if, invest in a fund and you are covered if it loses money.0 -
I think the fact there is no FSCS for ITs is worth mentioning, especially as a consideration for inexperienced investors. A respected IFA poster on this forum has also said so in previous posts:AnotherJoe wrote: »But in reality its a trivial difference that is extremely unlikely to ever be needed and I think its confusing to even mention it because to an investor as inexperienced as the OP it could be misinterpreted as if, invest in a fund and you are covered if it loses money.
https://forums.moneysavingexpert.com/discussion/comment/71677064#Comment_71677064 t+trusts
https://forums.moneysavingexpert.com/discussion/comment/72698261#Comment_72698261 t+trusts0 -
It is worth mentioning the FSCS protection but a constraint like "FSCS protection against failure but not investment losses" can help to reduce the chance of confusion.
AnotherJoe, re extremely unlikely, just have a read of Lehman Brothers and AIG in the not so distant 2008 events. Both were substantial counterparties to many investment contracts and illustrate that failure to pay is a real possibility. Relevant to synthetic ETFs in those cases. In a synthetic ETF you might in theory have a FTSE tracker but in fact have collateral in Japanese bonds underlying synthetic market performance. Products specifying "physical replication" shouldn't have this risk but would have higher costs.
Hannah4518 is unlikely to even unknowingly have much money go into such things but it's a useful bit of education. "Much" because it is likely that there's a bit of that in many products, including Vanguard Lifstrategy which specify "The funds may invest in financial derivatives".0
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