ETF v OEIC

[Festerarl]

First post, so please be gentle!

I understand the basic differences between ETFs and OEICs, but don't really understand why people prefer one over the other.
The main difference appears to be live pricing for ETFs.

Any thoughts?

Thanks

[Alaric]

The main difference appears to be live pricing for ETFs.

It's also active v passive as most OEICs are actively managed.

Another issue is that some platforms charge custody fees for OEICs but no dealing fees whilst other platforms do the opposite. ETFs are treated in the same way as individual company shares.

ETFs available to UK residents are usually based in Ireland or Luxembourg which may cause tax complications.

[Newroad]

Hi Alaric.

With respect to Irish/Luxembourg domiciled ETF's potentially causing tax complications for UK taxpayers, I'm presuming that excludes when they are held in a SIPP or ISA wrapper?

Regards, Newroad

[Alaric]

With respect to Irish/Luxembourg domiciled ETF's potentially causing tax complications for UK taxpayers, I'm presuming that excludes when they are held in a SIPP or ISA wrapper?

It's the elusive "Excess reportable income" that presents the problem - so not an issue with ISAs and SIPPs. Even when they distribute the income, it's liable to have to be reported separately on tax returns.

[GeoffF100]

Passive funds are available as both OEICs and ETFs. Both can be domiciled in the UK or Ireland. Some ETFs are domiciled in Luxembourg. Some of the more exotic passive funds are available only as ETFs, but you do not need to worry about them. As far as tax is concerned, withholding tax is not avoided by ISAs, and usually not by SIPPs either. There are differences in UK taxation between ETFs and OEICs for bond funds.

With ETFs, you can trade at a known price, but that price is determined by the market and may not be the same as the value of the underlying shares. With OEICs you do not know the price when you trade but you do know that it will be the same as the value of the underlying shares (unless there is an entry fee). Some brokers charge an additional platform fee to hold OEICs. You usually pay commission to trade ETFs, and may or may not pay commission to trade OEICs. ETFs have a market spread. OEICs usually do not, but can be subject to swing pricing. The Exchange Market Size for ETFs is not large on the UK market. That could cause difficulties if you trade in six figures or more. OEICs are the more idiot proof option in my opinion.

[JohnW]

Nice list.

With ETFs, you can trade at a known price, but that price is determined by the market and may not be the same as the value of the underlying shares.

Some financial services provide information on those differences. As well, ETF's have 'market makers' who are authorised to convert ETF shares to and from their component securities - meaning they can buy an ETF and then break it up into its 200 different shares and then sell those 200 different shares. They'll do that if they see a big enough difference in the price of the ETF and the value of the underlying securities, and it doesn't have to be very big for them to make some money, and by doing so they move the price of the ETF closer to the value of the underlying shares. Part of the genius of Nathan Most https://www.bogleheads.org/wiki/Nathan_Most.

ETFs have a market spread.

The more liquid and traded is the ETF, the smaller the spread. The more exotic, and the smaller the fund, the bigger the spread.

[GeoffF100]

ETFs can trade at discounts of 30% or more. The discounts of large whole market trackers have never got as big as that, however. The market spread depends on the volatility and liquidity of the share. The discount/premium for VWRL was 0.65% at the last close of trading:

https://www.bloomberg.com/quote/VWRL:LN

(Professionals will have the premium/discount on their screen in real time. You will not.) The market spread for VWRL spread is currently about 0.1%, but was much higher near the recent market low.

https://www.hl.co.uk/shares/shares-sear ... f-usd-dist

0.5% may not sound much, but is more than £500 on a £100K trade, so it is not small beer. You can easily burn £1,000 in an instant if you are not careful. You do not have that problem with OEICs or unit trusts.

[JohnB]

OTOH OEICs are only valued once a day, often noon, so if you place an order at 3pm you'd get next day's price. I used to buy near to the closing time for that day to reduce uncertainly, but realised that was attempting to time the market, which goes against a tracker strategy, was more stressful and made no difference with the swings and roundabouts of investing. The ETF instant confirmation seems more satisfying to me.

[JohnW]

Thanks for quantifying some of that. A fund, such as a global one, holding shares traded on some exchanges but not other exchanges will be uniquely difficult to price accurately as some shares will be un-tradable when the ETF exchange is open. That and whatever else contributes to premia/discounts.

[Lootman]

ETFs can trade at discounts of 30% or more.

Although that is theoretically possible it would be very rare and unusual. Where I have seen ETFs go to a significant premium or discount, it has been for very short periods of time and usually for the more illiquid funds.

Or where ETFs investing in places like Malaysia or Egypt went to large discounts when those underlying stock markets were closed, for instance. But then so would investment trusts investing in those markets, whilst open-ended funds might just be suspended in such extreme market conditions. In other words there is no way out of the suffering no matter what kind of collective you are in, if market conditions become that bad.

If you look at the annual reports for ETFs they will show the percentage of time the ETF has traded at various deviations from the net asset value. And it is remarkable how much fidelity that shows for the larger, liquid ETFs that track the major market indices.

If you are really worried then use a limit order. But this is nothing like the problem you are suggesting, in my experience.

[GeoffF100]

ETFs can trade at discounts of 30% or more.

Although that is theoretically possible it would be very rare and unusual. Where I have seen ETFs go to a significant premium or discount, it has been for very short periods of time and usually for the more illiquid funds.

Or where ETFs investing in places like Malaysia or Egypt went to large discounts when those underlying stock markets were closed, for instance. But then so would investment trusts investing in those markets, whilst open-ended funds might just be suspended in such extreme market conditions. In other words there is no way out of the suffering no matter what kind of collective you are in, if market conditions become that bad.

If you look at the annual reports for ETFs they will show the percentage of time the ETF has traded at various deviations from the net asset value. And it is remarkable how much fidelity that shows for the larger, liquid ETFs that track the major market indices.

If you are really worried then use a limit order. But this is nothing like the problem you are suggesting, in my experience.

I have said that the discounts have never got that big for large whole market trackers. Big discounts usually arise when the underlying stocks are illiquid. Currently, the largest discount seems to be 11.79%, on the US market:

https://www.thestreet.com/etffocus/trad ... nts-to-nav

I have seen much larger numbers. I once lost about £1,000 instantly buying SLXX, which is not particularly exotic. The financial services bonds had become illiquid (2008), and I had not done my homework properly. VWRL, the first stock I tried earlier is not exotic either. 0.65% matters to me. It might not matter to everyone. I am not saying do not buy ETFs. I buy them myself. Just be aware of the pros and cons, and do your homework.

[Lootman]

ETFs can trade at discounts of 30% or more.

Although that is theoretically possible it would be very rare and unusual. Where I have seen ETFs go to a significant premium or discount, it has been for very short periods of time and usually for the more illiquid funds.

Or where ETFs investing in places like Malaysia or Egypt went to large discounts when those underlying stock markets were closed, for instance. But then so would investment trusts investing in those markets, whilst open-ended funds might just be suspended in such extreme market conditions. In other words there is no way out of the suffering no matter what kind of collective you are in, if market conditions become that bad.

If you look at the annual reports for ETFs they will show the percentage of time the ETF has traded at various deviations from the net asset value. And it is remarkable how much fidelity that shows for the larger, liquid ETFs that track the major market indices.

If you are really worried then use a limit order. But this is nothing like the problem you are suggesting, in my experience.

I have said that the discounts have never got that big for large whole market trackers. Big discounts usually arise when the underlying stocks are illiquid. Currently, the largest discount seems to be 11.79%, on the US market:

https://www.thestreet.com/etffocus/trad ... nts-to-nav

I have seen much larger numbers. I once lost about £1,000 instantly buying SLXX, which is not particularly exotic. The financial services bonds had become illiquid (2008), and I had not done my homework properly. VWRL, the first stock I tried earlier is not exotic either. 0.65% matters to me. It might not matter to everyone. I am not saying do not buy ETFs. I buy them myself. Just be aware of the pros and cons, and do your homework.

Your example of SLXX, and most of the examples in the article you cited, are bond funds. Those can be more difficult to track as there is a very large number of issues, many of which will be illiquid. I would not buy any form of tracker for bonds, personally.

VWRL may occasionally sport a 0.65% discount or premium but it usually will not. I see from Bloomberg that the average is 0.14% and that is as likely to be in your favour as not. Also, because it invests globally there will always be some variation due to the fact that some of the underlying markets will be closed at the time VWRL is trading.

So I think if you stick to the major markets and do a reasonableness check before the trade, this is an entirely manageable issue. For VUSA, which is my largest holding, the average premium or discount is just 0.02%.

[Bathonian]

Personally I prefer ETF’s because it’s cheaper for me to hold them in a SIPP and ISA.

On AJ Bell, the fees for holding ETF’s and shares are 0.25% but capped at £3.50 per month or £42 per annum. For OIEC’s there is no cap. Therefore if you have more than £16,800 invested it is cheaper to hold an ETF over an OIEC. The story is the same for a SIPP but the cap is £120 so if you have holdings over £48k it is cheaper to hold ETF’s. 0.25% is in my case more than the charges from Vanguard for managing the fund, so it is not an inconsiderable about. The bigger your pot, the bigger the advantage to hold an ETF.

I only hold VRWP, which is the accumulating version of VWRL. I am not too concerned about the spread and premium/discount as typically these are very low and generally pay for themselves in the first year by virtue of the fee cap.

Of course with an ETF there is also no stamp duty to pay which sets them apart from say an investment trust where 0.5% would be payable. There is also no stamp duty with an OIEC however.

[GeoffF100]

VWRL may occasionally sport a 0.65% discount or premium but it usually will not.

As my link shows that is the latest number from Bloomberg. The numbers were similar when I was trading near the recent market low. I was selling directly held unsheltered UK shares (no discount/premium) and buying VEVE (cheaper than VWRL, and equivalent to it with about 10% VFEM added) in a Youinvest SIPP. I waited for VEVE to be at a discount and the spreads to be near 0.1% before doing the swap. (I was trading near the market low to avoid Capital Gains Tax.)

I have VEVE with Youinvest to avoid their platform fee. Youinvest had the cheapest SIPP when I opened the account. I have, however, got a Vanguard account that is free of their usual platform fee. Vanguard can now process in specie transfers. I set a transfer in progress when the Youinvest transfer fees came down in the new year.

I also have VFEM because it provides the markets that are missing from VEVE and the Vanguard Developed World ex UK OEIC. (The Vanguard Emerging Markets OEIC duplicates one country, South Korea if I remember correctly.)

Another important issue that I have not mentioned is that ETFs often pay dividends in USD, whereas the corresponding OEICs pay out in GBP. If you have big holdings, the foreign exchange commissions can be painful.

[Newroad]

Hi All.

My anecdotal experience on this, admittedly post the March 2020 lows, is as per Lootman etc - low spreads on VWRL and VAGP (the two I am in, for 50% of my portfolios in total). I haven't bothered calculating the spreads, but on inspection, they have appeared tight whenever I've wanted to trade. At time of writing (first thing, when spreads are often wide) VWRL's spread is 0.37% and VAGP's is 0.22%.

The bit about USD distributions is VWRL is relevant - but we're talking about a percentage of a low percentage, so I don't let it bother me. However, if it does bother you, one can get the accumulation version. Also, note for some wrappers, I think ISA's, the conversion will be forced upon you (as they cannot hold USD) whereas SIPP's can, I understand.

I go with those who want instant trade confirmation, so that in general rules out OEIC's and rules in ETF's. I don't trust a private company to set a price to benefit investors. In practise, there is a theoretic spread for OEICS IMO - if there are net redemptions on the day the price is set at the lower end of the spread, if there are net purchases, at the higher end.

I applied the same principle to mortgages when I had one - mine only ever tracked the BOE base rate, which was set for the whole economy - never a banks's own standard variable rate - which they will vary marginally (sometimes more) to suit their own ends.

Regards, Newroad

PS The spreads are now beginning to tighten, just after 9am, VWRL's spread is 0.17% and VAGP's is 0.15%

[GeoffF100]

It is up to you decide for yourself whether ETF spreads are acceptable.

As far a currency conversion is concerned, lets put in some numbers. £1M with a 2% dividend is £20,000. A broker commission of 1.5% is £300. That is not negligible to me. Yes, accumulating ETFs are now available on the UK market, but they do not avoid avoid currency conversion costs if you want the dividends in GBP (e.g. to spend). They also make CGT calculations a pain if they are unsheltered.

Vanguard now uses swing pricing for its OEICs and unit trusts. (They used to have dilution levies.) That imposes a cost if you buy when others are buying and sell when others are selling. If you do the opposite, you benefit. Yes, Vanguard could fraudulently set its OEIC prices, but they could also give fraudulent NAV values for their ETFs. If you do not trust the fund manager, do not buy their funds. There are some who will not buy funds at all - but they still have to trust someone (actually countless people).

[Lootman]

As far a currency conversion is concerned, lets put in some numbers. £1M with a 2% dividend is £20,000. A broker commission of 1.5% is £300.

I take it your mean FX commission there and not broker commission.

There are GBP versions of many major ETFs. So for instance the VUSA I mentioned earlier is available in a number of currencies including GBP, so there is no FX involved with trades.

Of course there is always FX involved somewhere if you are investing overseas. But the ETF can probably handle that at better rates than you could. And there is always the option of operating a USD-denominated account if the numbers justify it.

[Newroad]

Hi Geoff.

I think we're mostly in agreement - to the facts at least, if perhaps not what we'd do knowing them.

On the currency stuff, a 0.03% charge (1.5% of 2% or so) seems about right to me - and yes, it wouldn't figure in my considerations. I'm much more concerned about the core product.

"Trust" may have been too strong a word for me to use - an exaggeration to emphasise a point. The point, of course, was that there has always been a spread in some form for open ended funds IMO, whether Unit Trusts, OEICS or similar. It used to be around 5% for buying and arguably 0% for selling, but has gradually reduced and been "hidden"/"absorbed" in various forms - I don't intend this as pejoratively as my use of "trust" would have previously suggested.

I would need to see the actual cost data for "swing trading" on otherwise like-for-like products (e.g. OEIC vs ETF) to see if it is better or worse than what is achieved via the market via ETF's. Employed by a firm like Vanguard on liquid funds, I suspect it is quite reasonable for OEICS.

I was interested in your assertion about if you do the opposite, you benefit. I haven't studied this at all closely, but I would have thought if you were on the "right" side of things, it would be almost neutral. To give a simplistic example, I am guessing it works something like this ...

10 trades in the day
8 units of buys, 2 units of sells
The costs of the net 6 buys (8-2) is, say, £24 (i.e. 4£ per unit)

I would have thought that

The 8 buys are "charged" swing pricing of £3 per unit each
The 2 sells are not charged at all

I could of course be wrong!

Regards, Newroad

[GeoffF100]

10 trades in the day
8 units of buys, 2 units of sells
The costs of the net 6 buys (8-2) is, say, £24 (i.e. 4£ per unit)

I would have thought that

[list]The 8 buys are "charged" swing pricing of £3 per unit each
The 2 sells are not charged at all[/list

Two buys and two sells would be "netted off". Vanguard has to pay for 6 buys. It adjusts the price of the units up from the NAV to cover this cost. The price will be NAV + 6 * (cost for buying a unit) / 8. If you buy in at the top when everyone else is frantically trying to climb aboard, swing pricing pushes the price up a little more. If you get out when the going is good, you benefit. Everything is the other way round at the bottom. A spread is a dead cost whatever happens.

What I said about dollar dividends is true for dollar denominated funds, but not for sterling ones. If you buy the accumulating version of VEVE, you do avoid FX commission, but you pay the spread when you sell to raise the money.

The costs we are discussing here are usually small for small portfolios, but become significant if your portfolio ever becomes large (or you trade frequently). I can understand the desire to know the price before trading. Nonetheless, this is the passive investing board. On this board, we never have the foggiest idea whether the price is good or bad. We just accept the market price because we do not know any better. The price is as likely to rise as to fall intra-day as far as we know, so we do not care whether we get the price now or the price a little later. We just minimise the known costs.

[Newroad]

Hi Geoff.

Unless I'm missing something, you are basically agreeing with my simplified example of swing costing - albeit in a somewhat verbose way?

Noted on the passive forum bit - exactly one half of each of my portfolio's is passive, so it is relevant to me. However, whilst I accept the market price, I don't do so without thinking. For example, when rebalancing, which I do partially each month, I do so at a point when I judge spreads are OK. So, not taking a view on the market per se, just that it isn't being unreasonable as to on-costs.

If that's being vegetarian rather than vegan with respect to being passive, so be it - I'll take the classification.

Regards, Newroad