3 Adviser Views On Index Trackers vs ETFs

The news that Blackrock has slashed fees on index trackers to as low as 0.07 percent means they are an even cheaper option for cost-conscious investors, and cheaper than most exchange-traded funds (ETFs). Which do advisers prefer, and why? We ask three financial advisers for their views.

Justin Modray, Candid Financial Advice – “ETFs Fall Down On Complexity And Investor Protection”

ETFs and more traditional open-ended tracker funds both have their place. The obvious advantage with ETFs is real-time pricing and trading, although this potential benefit is largely irrelevant for long-term investors. ETFs also benefit from offering an increasingly wide range of indices to track, so there should be one to suit most tastes.

Where they can fall down for retail investors is protection and complexity. Given ETFs are invariably still domiciled outside the UK they are unlikely to be covered by the Financial Services Compensation Scheme if something goes wrong. This is especially a concern for swap-based ETFs where third parties underpin returns – if a counterparty fails the investors would likely lose money.

And when it comes to charges, open-ended funds generally have the upper hand these days, with a plethora of low cost offerings from the likes of Vanguard, Blackrock, Fidelity and L&G.

Lee Waters, Barwells Wealth – “Trackers Are Easier To Deal With On Platforms”

Index trackers tend to be easier to understand for a less sophisticated client, [and] the simplicity of trackers make them more appealing for model portfolios than ETFs. If you are trying to replicate something straightforward like the FTSE 100 or the S&P 500, it might be more advantageous than an ETF, which [also] incurs dealing charges. My client base is predominantly at retirement so they tend to favour trackers slightly more than ETFs - most clients tend to understand the concept and are happy to defer to whatever we suggest.

Trackers are reasonably easily available and easily accessible on platforms, possibly more so than ETFs, especially on fund supermarket platforms. Best execution is far easier with trackers than ETF – when placing a trade for an ETF you often have minimum investment amounts because they are quoted on a stock exchange [and are] daily priced, and the process which [the] platform goes through before a client's money is invested is far more time-consuming with ETFs than trackers.

Andrew Whiteley, Provisio – “Exiting ETFs Quickly Comes With Dealing Costs”

We've tried to keep the two separate - we have one portfolio with index-tracking funds and one with ETFs. ETF portfolios always most accurately reflect our asset allocation calls in that it's easier to build a portfolio exactly as you like. ETFs [offer] more coverage, say of different parts of the gilt market.

Both portfolios perform pretty much in line; we have never had a problem with tracking error for tracker funds. I'm a keen fan of ETFs.

[But] dealing costs are an issue on some platforms with ETFs. A lot of platform still charge dealing costs per trade; those that charge fees tend to bundle trades at the end of the day. This is not an issue for us, but if you desperately want to get out of a fund there is a cost with that.

There are holes in the index tracker market, for example there are no commodities [trackers] because these have to be synthetic. And there are other asset classes which are not so easy to find within the index tracker world. Equally, I suppose there are other ETFs that we wouldn't invest in because they just don't have the scale and there is always a chance they would be de-listed. There are pros and cons on both fronts.