Exchange Traded Funds (ETFs) are an increasingly popular way for investors to access the global financial markets. One of the key differences between an ETF and a ‘traditional’ fund is that regardless of the underlying asset, ETFs are traded on a stock exchange, just like company shares. Now that the sector is more established, it’s possible to pick out the top names with which to trade.
In this article, we will cover:
- What ETFs are
- The benefits of trading ETFs
- Seven of the best ETFs
- Other aspects to consider when choosing an ETF
What are ETFs?
ETFs are simply a convenient way to gain exposure to certain asset groups. They are technically a fund because the investor is buying a product that tracks an underlying asset.
Investors approaching the subject for the first time would do well to not let the inclusion of the term ‘fund’ put them off considering trading ETFs.
Traditional funds, such as mutual funds, were tailored to longer-term holding periods. ETFs accommodate those taking the long view, but also more immediate returns.
What’s more, the pricing and opaque trading practices of ‘traditional’ funds have been overhauled to make ETFs a convenient way to access interesting asset markets.
Benefits of trading ETFs
- Convenience — buy one share to track a whole index or market
- Choice — ETFs are offered on virtually all asset classes. There’s over 1,500 available to UK investors. The underlying asset groups range from bonds to commercial property and everything else in between.
- ETFs often come with low costs as they are ‘passive’ and don’t try and beat the market
- Pricing is real-time. Being able to access live prices throughout the trading day allows traders to track the value of their holding and know at what price they are dealing.
Seven of the best ETFs
IG – gold
IG is a true multi-asset broker that offers tens of thousands of markets to its clients. As you’d expect, it offers a range of gold exchange traded funds, which consist of just one asset — gold.
Each of the below IG ETFs derives its value from holding ‘underlying assets’ that are centred on the precious metal.
In the same way that the precious metal was a stellar performer in 2020, so were the ETFs. The 12-month percentage performance ranged from 37.1% to 38.34%.
Degiro — bonds
Industry site Index Investor has picked out Degiro’s offering of commission-free ETFs as worthy of consideration:
“This investment strategy is about having a safe asset in your portfolio. Since this asset has low risk, you also expect to have low returns. Ideally you would be investing in high quality bonds (i.e. higher than AA) government bonds denominated in your currency.”
Degiro also offers other asset classes. The bond ETFs give a taste of the wide range of asset classes that investors may want to consider. A diversified portfolio, of course, is a cornerstone of investment good practise.
Fineco — low cost trading
The investment experts at Fineco have for more than 20 years been offering their clients a one-stop-shop of investment products. Fineco’s site claims to be part of a ‘trading revolution’ and it may well be on to something.
The site makes it easy to navigate across funds and also offers pre-packaged selections. Access ratings and detailed information on each fund are provided to help you evaluate which best suit your needs.
Fineco is a market leader in terms of low-cost ETF trading. It also offers regular saving programs and a range of global ETFs, which tick the boxes for even the hardest to please investors.
Fidelity — US stocks
One theme of 2020 was the momentum found in US equities. The Fidelity ZERO Total Market Index Fund, founded in 2018, allows those who want exposure to this sector to buy one product, the ETF, rather than all the constituent parts.
This ETF charges no fees and no minimum. It was one of the first no-fee ETFs made available. Being able to invest for free is certainly a very exciting opportunity for individual investors and those new to the market.
Charles Stanley — emerging markets
The ETFs offered by Charles Stanley have been selected for their transparency, low charges and typically narrow spreads.
One of the top ETF picks is the Emerging Market iShares fund. It’s UCITS-compliant and comes with no performance fees.
Source: Charles Stanley
Plus500 — ETFs with leverage
Plus500 is one of the largest CFD brokers in the UK and also offers a range of ETFs. One of the neat features of the Plus500 offering is that ETFs can be traded with leverage. This scaling up on position size magnifies the risk return and Plus 500 offers ratios of up to 1:5.
It’s also possible to start with as little as £100, which means if you leverage to the maximum amount, you’d be effectively trading with £500 of exposure.
As you might expect from such a large outfit, all the major asset groups are covered.
AJ Bell — extensive market coverage
The range of ETFs offered at AJ Bell is quite considerable. Fortunately, the firm offers a ‘Screener’ which allows you to filter down to your preferred choice. Selection can be based on asset group or geographical location of markets.
Source: AJ Bell
The above graphic gives some idea of how extensive the offering is. When set to alphabetical order, it takes some time to move out of the letter ‘A’. There are even five different sub-categories of property ETFs.
Another neat feature of the AJ Bell service is the educational materials provided. This is tailored to both beginners and experienced investors and reflects the professional nature of the service offered.
Other aspects to consider when choosing an ETF
The risks associated with the investments are effectively the same as if you built the portfolio yourself. It’s convenient that ETFs pack up a range of assets and present them to you in a wrapper, but prices can still go down as well as up.
A lot of the firms compete on cost. This is, of course, a welcome by-product of a healthy market. It is important, though, to ensure the actual investment suits your personal objectives.
A profitable ETF with some costs is better than a zero cost one that trades under water.
ETFs are cheaper for fund management companies to run, so they often have a lower annual ongoing charges figure than a comparable unit trust or mutual fund. It is important to read the small print and factor in any fees for dealing when selling them, for example.
The ETF market is booming because the product sells itself. Compared to individual stocks, the funds offer a simple way to gain exposure to a whole sector. Compared to ‘traditional’ funds, the ETFs are cost-effective and traded using real-time prices.
As in all markets, the list of ‘best performers’ will continue to change over time. However, investors can take comfort from knowing that good, regulated brokers, are active in the market and are looking to offer them a chance to trade in the next big thing.