The Chancellor’s Budget: More Good News For ETFs?

The Chancellor’s budget announcement yesterday fulfilled all expectations – that is, the well choreographed leaks to the press and last minute surprises, the comedy routine in the Parliamentary chamber and George Osborne holding up his red briefcase. But for ETF investors, the headlines in the press yesterday and today fell rather flat.

After all, ETF investors happily received some big news in the autumn when Osborne said UK-domiciled ETFs would be excluded from paying 0.5 percent stamp duty on underlying shares from April 2014.

In saying that, the move was described by people in the industry as a lot of white noise: there are no UK-domiciled ETFs in London – and seemingly no plans from providers to launch them. In fact, the vast majority of European ETFs are domiciled in Ireland and Luxembourg.

However, a number of other budget announcements yesterday could have a stronger, albeit indirect, effect on existing ETFs in the UK. Here’s why:

The budget yesterday was a big win for UK businesses. Companies have been removed from paying national insurance contributions for under-25s, their annual investment allowance for expenditure on machinery and plants has been doubled to £500,000 and there are tax breaks for research and development.

“These will be really good news for UK equity funds – particularly those which invest beyond the largest companies,” said Adam Laird, passive investment manager at Hargreaves Lansdown. “I expect that FTSE250 funds will benefit.”

UK equity funds will also receive a boost from the general UK macro updates from Osborne yesterday. Britain’s gross domestic product is set to grow at 2.7 percent in 2014, a rise of 0.3 percent compared to the Office for Budget’s Responsibility forecast earlier in the year.

There was big news for individual savings account (ISA) holders, too. Over the past year we’ve heard several negative reports about returns being eaten up by fees or cash ISAs losing out to inflation. But the new ISA (NISA) means savers can now not only transfer from their cash ISA to the stocks ISA, but also transfer back from shares to cash. The annual allowance has also been raised to £15,000. This might mean more demand for low risk investments.

Still on the ISA front, short-term bonds were previously not allowed in the wrapper. Short-term bond ETFs, as well as Vanguard’s new short-term duration fund, were allowed however. George Osborne told the public that they can now buy the underlying bonds.

This could mean two things. Will short term ETF holders sell out to buy the underlying bonds instead? It also means that short duration products will be of more interest to investors.

“On balance, I think it’s probably a more positive story for investors but we’ll see how it develops,” added Laird.

On the energy side, the government pledged to maintain its cap on carbon emissions, as well as committing to keep the North Sea oil competitive and reiterating its promise to focus on green energy.

It will be interesting to see how this could benefit energy ETFs in the long term. One example is the Amundi ETF MSCI Europe Energy UCITS ETF, which has over 50 percent of its portfolio in the UK.

Separately – advisors might not be happy to hear that the government intends to provide “free” financial advice for everyone at retirement, which will cost £20 million. Some advisors are already grumbling that their community might face additional levies to make up the cost.

Of course, this is all speculative to a certain extent. None of these measures will be introduced straight away, and are certainly intended to keep the Conservatives in power at the next election.

Shaun Port, chief investment officer at online fund manager Nutmeg, said: "We hope to see the Government return its focus on ETFs in the future as we believe they are still relatively unknown and under-utilised by a lot of individual investors and, indeed, investment managers."

Watch this space.