What is an ETF ISA?
An exchange traded fund (ETF) are funds that issue shares which are traded on a stock exchange.
They can invest in a broad range of assets providing investors with access to specific markets, sectors and strategies at relatively low cost.
How does an ETF work?
ETFs provide investors access to a wide range of asset classes such as equities and fixed income. they can:
- Follow the performance of a market index such as the FTSE 100 or FTSE 250
- Follow the performance of a smart beta index which is weighted to deliver a specific outcome such as income or low volatility e.g. for low volatility smart beta, ETFs will seek to minimize volatility by tracking indices that demonstrate lower fluctuations during market turbulence.
- Be actively managed by a dedicated manager
- Be actively traded like any stock on an exchange
- Have low charges as passive trackers are generally cheaper than actively managed funds
With ETFs you typically know what you are investing in as there is transparency to what securities the fund holds as well as performance and costs (total expense ratio).
How do I invest in an ETF ISA?
You can invest in ETFs via a platform provider. Platforms include:
- Fidelity - Through the Fidelity platform once you set up an investment account you can invest in a wide range of ETFs provided by companies including Legal & General, iShares, Lyxor State Street, UBS, Vanguard and WisdomTree. Fidelity provide a screening tool to allow you to filter through over 250 ETF options.
- Hargreaves Lansdown - Provide a list of popular ETFs their clients are buying at any given time.They provide access to most major EFT providers.
- AJ Bell - With AJ Bell you can invest in ETF providers such as Amundi, Franklin, HSBC and Invesco. AJ Bell provides a screening tool to allow you to drill down to the ETF that might best suit your circumstances.
What does an ETF ISA Cost?
Not straightforward as the total cost will depend on how you buy the ETF.
ETFs are investments that are openly traded on a stock exchange, therefore the price fluctuates throughout the day depending on demand.
It's important to understand the difference between the price you pay for the investment (dictated daily by the stock market) and the dealing charges and service fees set by the fund manager and investment platform.
When you buy an ETF within your ISA account (using a platform such as Fidelity) you are placing a "market order" where you are given a quote to buy the ETF. This latest price is available to you for 15 seconds.
If you are happy with the quote you can buy the shares immediately. If you are not happy with the price you can wait another 15 seconds to refresh the quote.
Each ETF will have an ongoing annual charge which can range from 0.05% pa to 0.88% pa.
If you buy via a platform then there will be typically a platform annual charge - the cheapest platform providers charge from 0.25% pa.