City of London IT vs Vanguard FTSE 100 index fund

[Mike4]

Thanks for all this. As a hobby stock investor I had no idea there were indexes for each sector and trackers tracking them!

With any ETF it's worth checking what index it actually tracks and that the 'tracking error' (broadly the difference between the index and the ETF itself) - usually next to nothing.
All this is found on the information sheet from the ETF provider.

ETFs!

A scary term and something I've gone out of my way to swerve so far in my investing career. "Only invest in what you (think you) understand" is one of my personal maxims. Even so I've still managed to buy one or two funds which turned out not to be what I thought I was buying!

What's so scary about ETFs?
It's just a fund that is traded on an exchange.

For what it's worth, I only buy 'physical' ETFs rather than 'synthetic'.
Physical ETFs actually hold the shares they track.
Synthetic uses some trading voodoo to replicate the index.

You're making it worse!

What about 'open ended' and closed ended' funds? Aren't those terms associated with ETFs?

Maybe they ARE easy to understand but until now I've seen no need.

[Alaric]

What about 'open ended' and closed ended' funds? Aren't those terms associated with ETFs?

Generally speaking all ETFs are open ended. In other words, units are created when investors buy and are cancelled when they sell.

Open and closed is the distinction between OEICs (unit Trusts as were) and ITs (Investment Trusts). The advantage or disadvantage of Investment Trusts are that the number of share in issue is fixed, so if you buy, someone else has to be selling. As a consequence the market price will stand at a discount or premium to the net asset value. That assumes the net asset value is reliable in the first place, so ITs come into their own in sectors where the underlying investments are not quoted on any market.

Index tracking funds are invariably OEICs or ETFs.

[EthicsGradient]

What about 'open ended' and closed ended' funds? Aren't those terms associated with ETFs?

Generally speaking all ETFs are open ended. In other words, units are created when investors buy and are cancelled when they sell.

Open and closed is the distinction between OEICs (unit Trusts as were) and ITs (Investment Trusts). The advantage or disadvantage of Investment Trusts are that the number of share in issue is fixed, so if you buy, someone else has to be selling. As a consequence the market price will stand at a discount or premium to the net asset value. That assumes the net asset value is reliable in the first place, so ITs come into their own in sectors where the underlying investments are not quoted on any market.

Index tracking funds are invariably OEICs or ETFs.

That's a bit of a simplification for the ETF process:

Creation

Each ETF is stalked by several strange creatures that are called "authorised participants," (APs) which are usually investment banks. The APs are the gatekeepers determining how many ETFs get made and destroyed and they work closely with ETF providers to "make a market" for any ETF.
When APs want to create more ETFs - usually owing to investor's demand - they do the following.

Firstly, they go buy all the shares that are in the index an ETF tracks. So, say, for any FTSE 100 ETF, an AP would go and buy all the shares in the FTSE 100 - your HSBC, Shell, BP, etc.

Second, they bring the basket of FTSE 100 shares to the ETF provider and typically pay a small 'creation fee'. The ETF provider then gives them FTSE 100 ETFs in exchange for the basket. This 'creation' mechanism ensures that there are always enough ETFs to go around, and that they never really have to trade at premiums owing to too much demand.

Redemption

Redemption just works the other way. It is when APs want to destroy ETFs thinking there are too many of them in the market.

Let's say for example, that everyone is getting a bit fed up with British ETFs (due to Brexit, Corbyn, or whatever else) and a lot of investors choose to dump FTSE 100 ETFs en masse. For any close ended funds tracking the FTSE 100, this type of quick-fire dumping could well cause them to trade at discounts due to a lack of demand and no way to constrict supply.

But for ETFs this is no problem as they can be redeemed and destroyed. The way this works is that our APs bring the ETFs to the ETF provider and 'redeem' them for shares in FTSE 100 companies. And voila, the supply of FTSE 100 ETFs constricts.

https://www.etfstream.com/industry-corn ... edemption/

This involvement of third parties does make it more complicated - the APs "want" ("usually") and "think". This is based on these banks comparing the ETF price and the underlying asset value, and calculating they can make a profit. There is no automatic creation or redemption of ETF shares when you as a private individual buy or sell - you're trading in a market, the same as with investment trust shares. But the APs act to keep the discount/premium very small.