Informed Choice managing director Martin Bamford takes a similar stance, noting that although he has previously recommended ETFs he has since moved to index trackers. He says: “Tracker funds tend to be a better option for retail investors than ETFs, particularly when considering the more esoteric ETFs, which track niche indices, have inverse returns or gearing.”
Two challenges these passive vehicles face is their complexity, particularly ‘synthetic’ ETFs, as well as the fact they do not benefit from the protection of the Financial Services Compensation Scheme (FSCS).
Charges may also not be as cheap as first seems for smaller investors or those who are rebalancing in their portfolio because stockbroker’s costs need to be paid when buying or selling.
Patrick Connolly, certified financial planner at Chase de Vere, says: “ETFs can be difficult to understand and expose investors to an additional level of counterparty risk. We tend to use passive funds for exposure to more efficient stock markets such as the FTSE 100 and US large cap stocks.
“While there are cost, access and liquidity benefits to ETFs, there are also the potential dangers of investors selecting complex products, investing in high risk areas with little protection and maybe paying more in charges than they think.”
Philip Scott is a freelance journalist
Adviser views
Use of ETFs
Exchange traded funds may be a growing market, but what place do they have in a portfolio? We asked some advisers to give us their views.
Susan Hill, chartered financial planner at Susan Hill Financial Planning, says:
“Yes I use ETFs, they form part of my passive portfolio. Most index funds come either as unit trusts, Oeics or ETFs. I mainly use Vanguard although also iShares.”
Carl Melvin, certified and chartered financial planner at Affluent Financial Planning, says:
“I don’t use ETFs very often as I mostly use vanilla tracker funds. I don’t use them due to costs/brokerage, especially for regular purchases. But if I did I would always look to access them via a platform, as I suspect not many advisers will use direct to provider.”
Joss Harwood, co-director of Eldon Financial Planning, says:
“We currently use index tracking unit trusts in preference to ETFs. Our reasons are broadly for clarity of cost and potential volatility. Our clients don’t need the facility to trade during the day. When we can access Vanguard’s UK Equity index tracker for a known 0.15 per cent per year with barely any tracking error, there is a strong argument for taking that certainty for our type of client.”
David Penny, managing director of Invest Southwest, says:
