Investing in exchange traded funds

Learn more about what exchange-traded funds are, how they work, and how to invest in ETFs.

What is an ETF?

An exchange-traded fund, or ETF, is a type of collective investment. They’re also called ‘passive’ or ‘tracker’ funds because, unlike an active fund, the fund manager is ‘passive.’ That means they don’t try to outperform a specific stock market index (such as the FTSE 100).

How do ETFs work?

ETFs aim to follow, or ‘track,’ the index’s performance. Other indexes that ETFs track include bonds, a selection of commodities or a basket of companies share index.

Because ETFs are not actively managed, there’s no risk of fund manager error. It also means lower fees, coming in around 0.3% to 0.5% a year – sometimes even cheaper. The downside is that, unlike a (well-managed) active fund, an ETF won’t beat a benchmark, just track it.

The benefits of investing in ETFs

There are many advantages of investing in ETFs, including:

• Diversification: With an ETF, you can access whole asset classes, geographies and specific sectors. And because an ETF offers exposure to an index that is itself a broad basket of securities, your portfolio is diversified even further, reducing your overall risk
• Specialisation: With an ETF, you can target a specific theme, such as an individual country, industry or kind of investment, such as small caps
• Easily traded: ETFs are easy to trade during normal market conditions
• Low-cost: ETF annual fees are as low as 0.10%, with the standard 0.35% to 0.5%
• Tax-efficient: ETFs aren’t subject to the 0.50% stamp duty, while London-listed ETFs are SIPP and ISA-eligible

Are there any downsides?

Investing in ETFs isn’t without potential drawbacks. For example:

• ETFs are unlikely to outperform their benchmark index – they just track it (minus the running costs and fees)
• index-matching performance isn’t guaranteed and tracking differences can mean the fund falls short of the index’s performance
• tracking errors can cause volatility in the ETF’s quoted price relative to changes in the underlying benchmark

When choosing an ETF, it’s important to keep these considerations in mind.

How to choose an ETF

To help you research ETFs, we’ve created Our AJ Bell Favourite funds list. It includes our tracker fund or ETF picks, which you can use to create a shortlist. You’ll also be able to access the fund factsheets and key investor information document (KIID) to help with your research. The AJ Bell Favourite funds list is not a personal recommendation.

How to invest in ETFs

Investing in ETFs is simple. You can buy and sell them online just like shares, as they are traded on the London Stock Exchange. This means you can get an online quote between 8.00am and 4.30pm Monday to Friday.

How to buy ETFs

You can buy ETFs like ordinary shares and add them to your Self-invested personal pension (SIPP), ISA, or Dealing account.

We have a wide range of ETFs for you to choose from. For buying and selling ETFs, we have a £5.00 online dealing charge and an account charge for holding the fund. You’ll also pay a charge to the fund itself – usually called the fund manager’s charge.

These charges are included in the fund price and can be found on the fund factsheet. Learn more about our charges and rates.

How to invest in ETFs regularly

You can save from £25 per month into a wide range of tracker funds using our regular investment service. Simply set it up online, and we’ll invest automatically every month into the fund of your choice. It’s an excellent way to save regularly and build up your portfolio.

Choose the right account for you and start investing in ETFs today

SIPP

Put your pension pot in your own hands with our award-winning Self-invested personal pension.

More on SIPP investments

Stock & shares ISA

Invest £20,000 this tax year into our tax-efficient ISA, and access your money when you want it.

More on Stocks and shares ISAs

Dealing account

Our Dealing account is low-cost and unlimited. Invest as much as you want, whenever you want.

More on Dealing accounts

Accounts for children

Build a nest egg for your children with our Junior ISA, Junior SIPP and Dealing accounts for children.

More on investing for children

Lifetime ISA

Invest up to £4,000 per year in our Lifetime ISA and get a government bonus of up to £1,000.

More on Lifetime ISAs

Why invest in exchange traded funds with us?

• Help choosing the right tracker fund for your portfolio with our Favourite funds list
• Low-cost dealing charge of £5.00 for buying and selling
• Deal on the go with our mobile dealing app
• Wide choice of exchange traded funds
• Save regularly from just £25 per month

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Photo by Tyler Prahm on Unsplash