Index Trackers Vs ETFs: 3 Key Differences

These passive funds look similar but have developed and operate in a totally different way  

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Editor, etf.com Europe
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Reviewed by: Rachael Revesz
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Edited by: Rachael Revesz

Tracker funds have grown significantly in assets under management over the last year, have further cut their annual fees and are still luring the mainstay of financial planners who have a conviction in passives. However, ETFs tend to offer more liquidity, choice and methods of index replication, but they have not broken into the advisory market to the same extent.

Research from Numis, published on 3 August, found that passive tracker funds saw record net inflows of £727 million at the end of June 2015, and now have assets of £104.3 billion. Partly helping this growth is passive funds’ low-cost nature. In the last month alone, Vanguard has scrapped its dilution levy for new investors on its LifeStrategy funds, Legal & General Investment Management has reduced costs and BlackRock has also slashed headline fees.

As trackers now represent 12.1 percent of the overall industry assets in the UK, according to Numis, compared with 10.4 percent in June 2014, Kenneth Lamont, passive funds research analyst at Morningstar, reminds us of the three key differences between exchange traded funds and passive trackers.

1) Trading Is Different

ETFs are exchange traded, meaning investors can buy in and sell out at any point during market opening hours. However, passive trackers trade in a similar way to actively managed funds and are therefore potentially less useful as tactical tools.

“Mutual funds are priced once a day and have a traditional mutual fund structure, whereas ETFs are priced throughout the day and trade like stocks on exchanges,” said Lamont.

2) More ETF Choice

With over 1,400 ETFs in Europe, investors can gain exposure to ever more exotic and far flung corners of the market, from Sterling-denominated gilts and emerging market debt in local currency, to European banks and U.S.-based robot-maker companies.

“ETFs, certainly in Europe, have a far larger breadth of exposure,” added Lamont. “For example, you may be example to get an ETF that gives you sole access to one country like Vietnam, whereas this exposure is not available with index funds.”

3) Index Replication

Physical, optimised, sampled, synthetic – the ways that ETFs are able to replicate their underlying index tend to be more plentiful than index funds, which are usually of the plain vanilla type.

“ETFs are more versatile in the sense that there is a far higher percentage of these funds which are synthetically replicated as opposed to physically replicated,” said Lamont.

 

Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.