Page 45 - DIY Investor Magazine | Issue 39
P. 45

There are many reasons to put Exchange Traded Funds (ETFs) at the heart of your investing strategy – writes Dominique Riedl
ETFs have grown popular very quickly with investors; the number of products available has skyrocketed and at the end of 2021 the total invested in ETFs in Europe topped $1.5 trillion, winning assets from active managers and traditional index funds.
ETFs are Easy - bought and sold like any other share; Transparent – they seek to replicate the returns of a stated index; Flexible – funds that track everything from the entire global stock market to particular sectors, countries, or assets.
Easily traded – ETFs can be cost-effectively bought and sold via an online broker.
Liquid – trade any time during normal market hours, unlike traditional funds.
Cheap – Low running costs compared to active funds that they invariably beat; no stamp duty is payable when you buy an ETF.
Simple– Investing in shares is best left to the professionals, but even active funds require research; ETFs are straightforward investments that aim to match an index.
Broad – There are 800 ETFs listed on the LSE alone, delivering exposure to most countries, regions, sectors, and asset classes.
Diversified – An ETF gives you instant exposure to the dozens, hundreds or even thousands of securities that make up the index it tracks – instantly diversified exposure to different asset classes.
Income – Many ETFs pay dividends from their holdings to enable you to build an ETF income portfolio; lower costs mean more goes to you.
Pricing - The price of most ETFs closely reflects the value of the assets they hold, unlike investment trusts which can trade at a premium or discount to NAV.
Transparent – when more than one ETF tracks an index, it is easy to compare their cost, risk and return characteristics with justETF’s powerful tools.
Tax efficient – The majority of ETFs can be held within SIPPs and ISAs, meaning your income and capital gains are tax-free.
ETFs are worth considering in most situations, but at times other
Nov 2023 options may have the edge.
 Cash – If you want to hold cash, a Cash ISA or savings account may be better than a money market ETF to avoid dealing fees, and the regulatory compensation position is clearer.
Overtraders – Many traders (including hedge funds) use ETFs, but frequent trading might increase costs and potentially reduce returns, compared sitting tight in a less flexible index fund.
Not always cheaper – Certain index funds may have lower annual charges than the ETF equivalent, although ETFs are getting ever cheaper - one FTSE 100 ETF costs just 0.07% a year - 70p per £1,000 invested.
Risk – Irrespective of the asset class they follow, leveraged and short ETFs have downside risks that you must appreciate before even considering purchasing them.
Illiquidity – While most ETFs are very liquid, some small or specialist ETFs may rarely trade, which can mean a costly bid/offer spread. An appropriate mutual fund may be a better alternative.
No outperformance – ETFs only aim to match the returns
from an index. Putting your money with an active fund manager might do better, though numerous studies have shown few beat the market long-term.
Most private investors will find that a portfolio of ETFs can meet all their investment needs, whether building up their wealth or looking to generate an income.
Of course, you must do your research. Our strategy builder and screening tools are a great way to get started.
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