10 Things You Should Know About ETFs

March 13, 2014

Global exchange traded fund (ETF) assets hit $2.25 (€1.63) trillion last year, which reflected a year-on-year growth of 28 percent. Impressive for a sector that still makes up less than 10 percent of the total mutual fund industry.

In brief, an ETF is part of the mutual fund family, but the biggest differences are that ETFs can be traded throughout the day, and are cheaper and simpler. Trading an ETF throughout the day means investors have the option to use it as a buy and hold tool or as a positional tool.

The first ETFs were launched in 1993 by Boston-based State Street Bank and were known as SPDRs (Standard and Poor’s Depository Receipts).  The SPDR S&P 500 continues to be the largest ETF in the world with $159 billion invested. However, Europe had to wait a while longer for ETFs take off. On 11 April 2000 Merrill Lynch launched two ETFs tracking the Eurostoxx 50 and Stoxx 50 indices on the Frankfurt Stock Exchange. Then on the 28 April 2000 iShares launched the UK’s first ETF on the London Stock Exchange, which tracked the FTSE 100.

Rebecca Hampson, European Editor at ETF.com talks to two of the UK’s ETF specialists on the top ten things investors should know about ETFs in the UK.

 

1.) Most UK listed ETFs are domiciled in Ireland, Luxembourg and France

Peter Sleep, senior portfolio manager at 7IM says that most UK listed ETFs are actually domiciled in Ireland, Luxembourg or France. However, the UK government is trying to encourage the development of a UK domiciled ETF industry by announcing tax breaks in the last Autumn Statement.

2.) ETFs are not part of the UK’s FSCS Scheme

ETFs are not part of the UK’s Financial Services Compensation Scheme whereby end clients are eligible to receive up to £85,000 for investments.

“This is because they are usually domiciled in Ireland, Luxembourg or France,” says Sleep.

3.) ETFs are not subject to stamp duty

This means that they’re cheaper than investing in individual shares in the UK, explains Adam Laird, head of passive investments at Hargreaves Lansdown.

Investors currently have to pay 0.5 percent stamp duty on underlying UK shares.

4.) ETFs are used by a wide range of investors

ETFs are used widely. Data from Hargreaves Lansdown’s platform shows that ETF assets have doubled in just over three years. “They’re particularly popular amongst younger investors- almost one in every ten in their 20s and 30s hold an ETF,” says Laird.

5.) ETFs can be used in ISAs or self-invested personal pensions

ETFs can be used in tax wrappers like ISA or SIPP pensions. This is important to remember because, whilst not all ETFs pay out income, they get the same tax benefits as funds. “You have no additional tax on either income or capital gains for ETFs in an ISA or SIPP. This is particularly useful for corporate bond ETFs, where there’s no income tax on interest payments,” says Laird.

But Sleep warns that if investors are buying outside their SIPP or ISA, they should ensure that their fund has UK “Reporting Status” or UKRS.  If they do not, any capital gain will be taxed as income, which could mean that an investor pays income tax on gains at up to 45percent instead of capital gains tax up to a maximum of 28 percent.

 

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