Ever considered an Exchange Traded Fund (ETF) only portfolio? For many DIY investors, it could be the cheapest way of owning a diversified portfolio of index trackers.
Now that the era of passive investors being subsidised by their wide-eyed active investing cousins is over, it is still possible to avoid platform charges altogether by owning a portfolio invested 100% in ETFs.
Execution-only brokers TD Direct Investing and Sippdeal both currently waive platform fees for ETFs. You’ll only pay broker fees when you trade and even that hit can be softened by exploiting regular investing schemes.
More on that below.
So what would an ETF-only portfolio1 look like? Here’s a pretty diversified slate:
|Asset class||ETF name||Ticker||OCF (%)|
|UK equity*||SPDR FTSE UK All Share||FTAL||0.3|
|International**||Vanguard FTSE All World||VWRL||0.25|
|Emerging markets||Vanguard FTSE Emerging Markets||VFEM||0.45|
|Global property||HSBC FTSE EPRA/NAREIT Developed||HPRD||0.4|
|Government bonds (Gilts)||Vanguard UK Government Bond||VGOV||0.12|
|Index-linked gov bonds||DBX iBoxx UK Gilt Inflation Linked||XBUI||0.2|
* A cheaper UK equity fund is VUKE – Vanguard’s FTSE 100 ETF (OCF 0.1%).
** VWRL is approximately 10% in emerging markets. Add VFEM for a stronger dose.
Despite all this platform fee chicanery, an ETF-only portfolio won’t always make sense. It’s only worthwhile if the portfolio’s total cost (i.e. the weighted sum of the fund OCFs) is less than the platform fee you’d have paid for a portfolio including funds (plus the difference in trading charges).
If you’re stuck on TD Direct then that’s easy. TD’s 0.35% platform fee2 means that every fund you own effectively costs 0.35% more than its advertised OCF. That’s a high bar to get over and you’d have to own a portfolio smaller than around £10,000 (or be a trading fiend) not to do better in ETFs.
On Sippdeal you pay a fixed platform charge of £50 per year plus trading fees on all investments. If your ETF portfolio’s average OCF siphons off £50 more than its fund-based counterpart then it’s not worth it.
The bigger your portfolio, the less likely you are to benefit because it’s quite common for index funds to be cheaper than ETFs in the UK, unlike the US.
Charles Stanley overlooks its 0.25% fee on ETFs if you trade six times or more every six months. But a flat £10 dealing charge means you’re better off with TD Direct.
Sippdeal and TD Direct are both better prospects for an ETF-only portfolio because they enable you to set up a regular investment scheme that only costs £1.50 per purchase.
Gaming regular investment schemes
To keep costs down, I’d buy one ETF every month for my portfolio. For example, I’d buy my entire year’s worth of property ETF in June and my FTSE All Share ETF in July and so on. There’s no need to drip-feed into every ETF every month.
Your broker can’t make you invest every month either, so once you’ve had your fill, just cancel your regular order, and replenish your reserves if cash is tight.
It doesn’t matter to me that regular investing means I buy on a fixed date in the month that’s decreed by the broker. Passive investors don’t believe in market timing, so I wouldn’t lose sleep over picking my moments.
Sell orders are conducted at full price with these regular services, but if you rebalance with new money then you can largely avoid selling until your portfolio gets mahoosive. (Some brokers, notably Halifax, also offer monthly special deals where their usual trading fees are discounted for a few hours. You could time your rebalancing to exploit this).
The technical differences between ETFs and funds are practically negligible for most passive investors, too. The hoo-ha about synthetic ETFs was overblown, and I don’t have any qualms about using them when they best track the asset class I want a piece of.
No straight answers
As ever, by the time I’ve written up an investing stratagem, I’ve thought of half a dozen ways to undermine it and I can’t help but ‘fess them up. Such is the tangled web of investing!
Personal circumstances are everything in the field of cost bullet-proofing and the chances are that most small investors will do better in funds with Charles Stanley Direct, if their portfolio is likely to remain under £20,000 for a good stretch.
Meanwhile large investors will generally profit from choosing a fixed fee broker and investing in the cheapest trackers they can get – whether a fund or an ETF.
Let our broker comparison table be your guide.
The best advice is not to sweat it too much. Low cost is good, but endlessly fiddling in pursuit of perfection is a waste of life.
Take it steady,
- An even simpler portfolio would be to simply combine VWRL with VGOV.
- Payable from August 1 2013.