ETFs are similar to open-ended funds (including unit trusts) but they invariably track the performance of major indices and sectors by way of duplicating their constituents. ETFs provide the Baron & Grant portfolios with low-cost access to a variety of asset classes and international markets, thereby broadening the scope and diversification of our portfolios while also dampening volatility and increasing liquidity.
Let’s look at the advantages of their use in more detail:
Liquidity
ETFs can be traded throughout normal market hours, unlike traditional unit trusts and OEICs which can only be traded once a day. They also tend to be more liquid than unit trusts when markets are volatile.
Volatility
ETFs can help to dampen portfolio volatility. This is an important feature for our clients given investment trusts can be more volatile at times courtesy of their gearing.
Diversification
Buying an ETF gives you instant exposure to the index it follows. It’s an effective way to get diversified exposure to different asset classes.
Cheap to run
Running costs are low compared to active funds.
Wide scope
There are 1268 ETFs listed on the London Stock Exchange alone, allowing exposure to most countries, regions, sectors, and asset classes.
Many pay an income
There are many ETFs that pay dividends from their holdings of shares, bonds, or property. However, they can not ‘store’ income for rainy days like investment trusts (see Why Investment Trusts?).
Can be held in SIPPs and in ISAs
The majority of ETFs can be held within SIPPs and ISAs, meaning clients’ income and capital gains are tax-free.
No stamp duty
Buying most non-AIM UK shares attracts stamp duty at 0.5% – no stamp duty is payable when an ETF is bought.