ETFs | Oiecs/UTs Article continues after advert |
Trade on exchanges | Don’t trade on exchanges |
Traded through an online platform or adviser who would route the order to the exchange | Directly with fund manager, online platform or adviser |
Priced all throughout market operating hours | Priced once a day |
Pricing is extremely transparent as trading takes place throughout the day. | Pricing can appear opaque and price point is not known at time of trade, since trade takes place once a day. |
Price of the ETF hovers around its NAV throughout the day and any significant dislocation is arbitraged away by market makers and authorised participants | Price for the unit of share is exactly equal to the NAV/share or unit of the fund |
Can be physically/synthetically replicated | Almost always physically replicated |
Can own only whole number of shares, like stocks | Can own fractional amounts |
Commissions apply per trade, just like stocks | Commissions do not apply |
Bid/Ask spread is typically low for popular and well traded ETFs. It mainly depends on the liquidity of the underlying constituents | Bid/Ask spreads in UTs can be relatively high compared to ETFs. Even though Oeics quote a single price the bid/ask spread is built into other charges |
Mostly passive in its investment approach. Very few active ETFs available. | Mostly active in its investment approach. Very few funds are index trackers compared to the plethora of actively managed funds. |
Typically tracks an index | Typically attempts to beat a benchmark |
Total Expense Ratios are low | Total expense ratios are higher since most Oeics/UTs are active funds and have high management fees. Very few Oeics are index trackers which have low expense ratios. |
Returns are known as it follows an index | Possibility of significantly outperforming its benchmark except for index trackers. |
But the main distinguishing factor is the availability of different investment strategies through ETFs that are not available through index trackers.
Similar exposures can be gained through Oeics (active fund managers) but typically management fees for those funds are high and they come under the active management umbrella.
Index trackers come only in the plain vanilla type, which means they mainly track broad market indices which are market capitalisation weighted. Other niche exposures can only be taken using low cost ETFs as there are no substitute Oeic/UT Index Trackers for them.
Exposure | ETF | Tracker Fund |
UK Small Cap | iShares MSCI UK Small Cap Ucits ETF | Not available |
UK Property REIT | iShares UK Property UCITS ETF | Not available |
Japanese Equity – GBP Hedged | UBS ETF – MSCI Japan hedged to GBP | GBP Hedged version is not available. |
US Technology Sector | PowerShares EQQQ Nasdaq-100 Ucits ETF | Not available |
Commodities – Gold | ETFS GBP Daily Hedged Physical Gold | Not available |
Smart Beta - UK Low Volatility Factor | Ossiam FTSE 100 Minimum Variance ETF | Not available |
Smart Beta - Europe Quality Factor | iShares MSCI Europe Quality Factor Ucits ETF | Not available |
Smart Beta - World Momentum Factor | iShares MSCI World Momentum Factor Ucits ETF | Not available |
This becomes a very important factor in choosing ETFs over tracker funds when building a portfolio of passive products.
For platforms to support portfolios built from passive products it is now imperative to have ETFs available for them to stay competitive. Such low-cost and sophisticated exposures cannot be obtained in any other form except for ETFs.
So why have ETFs failed to take off in the UK?
