Future of OEIC vs ETFs

[International]

Hello,

I'm with HL who charge percentage platform fees for "funds" but a flat fee for ETFs. I have been pondering either:

- Moving to iWeb and staying with "Funds", which are OEICs in my case.
- Staying with HL and moving to ETFs.

I have noticed that in the UK we seem to have a good choice of OEICs, which is not the case elsewhere.

I think I have got my head around the differences between the two from reading this forum and other resources. I think I prefer "funds"/OEICs to ETFs, but it is more a case of familiarity.

My question is this: given that ETFs are newer and more fashionable, do you think OEICs/funds will gradually die out in favour of ETFs?

Thanks for any thoughts.

[Alaric]

do you think OEICs/funds will gradually die out in favour of ETFs?

You are partly asking whether actively managed funds (most OEICs) will lose out to funds tracking an index (most ETFs)

[tjh290633]

Hello,

I'm with HL who charge percentage platform fees for "funds" but a flat fee for ETFs. I have been pondering either:

- Moving to iWeb and staying with "Funds", which are OEICs in my case.
- Staying with HL and moving to ETFs.

I have noticed that in the UK we seem to have a good choice of OEICs, which is not the case elsewhere.

I think I have got my head around the differences between the two from reading this forum and other resources. I think I prefer "funds"/OEICs to ETFs, but it is more a case of familiarity.

My question is this: given that ETFs are newer and more fashionable, do you think OEICs/funds will gradually die out in favour of ETFs?

Thanks for any thoughts.

They might. The big advantage of ETFs is that you can trade in real time, whereas OEICs trade at a price to be determined at the next valuation. The alternative collective investment is Investment Trusts, which are closed end, unlike ETFs which are open ended. ITs can also be at a discount or premium to NAV. Despite slightly higher charges, ITs can also do better than OIECs or ETFs because of their ability to borrow.

You need to look at returns after charges to make a comparison. Assuming that lower charges are an advantage may be a fallacy. Fundsmith might disabuse you.

TJH

[International]

You need to look at returns after charges to make a comparison. Assuming that lower charges are an advantage may be a fallacy. Fundsmith might disabuse you.

TJH

Good point, thanks. I have made a spreadsheet that compares OCFs of similar (as I could make it) OEICs/ETFs and it does show that the OCFs are a bit cheaper with the OEICs. But I haven't actually looked at the TR, so there might some internal drag in the the OEICs. I will do that.

[International]

You are partly asking whether actively managed funds (most OEICs) will lose out to funds tracking an index (most ETFs)

I should have stated: all the funds I am looking at are passive, whether structured as OEIC or ETF. It is just the available structures I am looking to compare.

Nothing exotic:
A US tracker
A Europe tracker
A UK tracker
A Japan
An Asia tracker
A Global Bond tracker

[kempiejon]

Nothing exotic:
A US tracker
A Europe tracker
A UK tracker
A Japan
An Asia tracker

Just as a clarification and I do something similar many Europe trackers included UK as Asian, Japan. Vanguard etfs let me pick Europe exUK and I think only do Asia ex Japan and just Japan.

[International]

many Europe trackers included UK as Asian, Japan

Yes, I noticed that. I am thinking of breaking them out as you have done so I can play with the weighting if I want. This is mostly as I fear US is toppy at the moment. For the record I have been historically wrong about overvaluedness with US, Gold and Bitcoin.

[Alaric]

You are partly asking whether actively managed funds (most OEICs) will lose out to funds tracking an index (most ETFs)

I should have stated: all the funds I am looking at are passive, whether structured as OEIC or ETF. It is just the available structures I am looking to compare.

A couple of potential disadvantages with the OEIC structure. You can only deal once a day at a price you don't know until it happens. Also some Brokers charge as a percent of OIEC value. Against that you may be able to buy or sell OEICs free of Broker commission.

[GeoffF100]

I recently identified OEIC and ETF pairs tracking the same index. After allowing for costs, there was no discernable difference in the long term total return. However, ETFs have spreads and can trade at a discount or premium to their NAV. OEICs single priced, but they have swing pricing. The price will not usually be the same as the NAV. They will also not be priced at the same time. If you sell and OEIC and buy an equivalent ETF, you could incur a significant loss, or in some cases gain from the transaction. You cannot predict whether you will gain or lose in advance or by how much. You can see these wobblies on the Morningstar comparisons.

[JohnW]

However, ETFs have spreads and can trade at a discount or premium to their NAV.’

As usual, how big is the size? Rhetorical question.
ETF’s must have spreads, however small sometimes, and thus with a different price for buying and selling they must be trading at a discount or premium for at least one of those trades, I’m guessing. The nature of ETF’s is the creation/redemption process that market makers bring to the pricing, which has an effect of tending to minimise the discount/premium to NAV because that’s how the market makers make their money; it’s in their interest to take advantage of the discount/premium, and so if there’s enough competition between the market makers the discount/premium ought to be small. I think.

[GeoffF100]

However, ETFs have spreads and can trade at a discount or premium to their NAV.’

As usual, how big is the size? Rhetorical question.
ETF’s must have spreads, however small sometimes, and thus with a different price for buying and selling they must be trading at a discount or premium for at least one of those trades, I’m guessing. The nature of ETF’s is the creation/redemption process that market makers bring to the pricing, which has an effect of tending to minimise the discount/premium to NAV because that’s how the market makers make their money; it’s in their interest to take advantage of the discount/premium, and so if there’s enough competition between the market makers the discount/premium ought to be small. I think.

Look at the numbers. Search for "VWRL discount/premium". You will find the Bloomberg quote. (I have not posted a link because you only get a few free views, and you do not have to load the page to get the relevant numbers.) The last discount/premium reported was -0.07%. The average 52-week premium was 0.06%. That is a favourable case. VWRL is big ETF holding very liquid assets, and we currently have an orderly market. Nonetheless, the discount/premium is about the same size as the spread (and you only lose half the spread when you buy or sell). There are some much more unfavourable cases, even in the current market:

https://www.etf.com/sections/features-a ... -discounts

There is an ETF currently trading at a whopping premium of 97.3%, but that is exceptional.

[JohnW]

Thanks. Nice broad view of the issue. Another reason in favour of keeping 'mainstream' with ETFs.

[International]

I recently identified OEIC and ETF pairs tracking the same index. After allowing for costs, there was no discernable difference in the long term total return... You can see these wobblies on the Morningstar comparisons.

Thanks Geoff. Would you mind sharing the details of the pairs you identified? I had a go at making a comparison between

LEGAL & GENERAL US INDEX CLASS C - ACCUMULATION (GBP) https://www.hl.co.uk/funds/fund-discoun ... cumulation
ISHARES VII PLC CORE S&P 500 UCITS ETF ACC (GBP) (CSP1) https://www.hl.co.uk/shares/shares-sear ... tf-acc-gbp
VANGUARD FUNDS PLC S&P 500 UCITS ETF USD ACC (GBP) (VUAG) https://www.hl.co.uk/shares/shares-sear ... ts-etf-usd

and came up with this. The ETFs seem comparable and I think I am seeing the drag with the higher VUAG charges. I am not sure I am comparing apples with apples across the OEIC and ETFs though.

Discrete calendar year performance
Investment
13/03/19 - 13/03/20 13/03/20 -13/03/21 13/03/21 -13/03/22 13/03/22 -13/03/23 13/03/23 -13/03/24
L&G US Index Trust C Acc -3.57% 43.85% 14.51% -1.44% 28.56%
CS&P500UE A -1.82% 39.26% 16.49% -0.67% 28.43%
S&P 500 UCTSETF A - 41.08% 16.79% -0.69% 28.09%

Cumulative performance
3 months 6 months 1 year 3 years 5 years
L&G US Index Trust C Acc 8.98% 13.58% 28.56% 45.08% 101.26%
CS&P500UE A 9.04% 13.36% 28.43% 48.61% 103.19%
S&P 500 UCTSETF A 9.02% 13.4% 28.09% 48.57% -

[GeoffF100]

I mostly looked at VWRL vs HSBC FTSE All World Index Class C, but I also looked at:

VUKE vs Vanguard FTSE 100 Unit Trust
VUSA vs UBS S&P 500 Index Class C
VAGP vs Vanguard Global Bond Index Fund

The long term performance of an ETF and the equivalent OEIC is essentially the same (after allowing for cost differences), but the winner depends on the start and end points. It is informative to look at the Morningstar comparisons over short time periods. You can get a really bad deal if you swap on an unfavourable day. If you are swapping from a large OEIC holding to an ETF, it is best to do it stages to mitigate against that. Better still, sit tight, and transfer to another broker if needs be.

[GeoffF100]

Bloomberg is currently showing the premium/discount of VEVE:LN as 0.59% which is more than ten times the average 52-week premium of 0.05%. Swing pricing for the OEIC could also work against you. The OEIC may be priced at the close of trading the NYSE, and you cannot trade an ETF on the LSE at that time.

Two fiver brokerage commissions on a £100K trade is 1 basis point. You can lose 100 basis points if you are unlucky swapping an OEIC for an ETF or vice versa. Beware!

[skyshield]

Both OEICs and ETFs have their perks, and while ETFs are gaining traction, I don't see OEICs disappearing anytime soon. It really comes down to what fits your investment style best. If you're comfortable with OEICs, stick with them. Trust your gut on this one.

[ukmtk]

I'm with HL too - have been for the last 12 years. I only pay £200 per year to HL.
I chose them as they are large, reliable, friendly and have a large selection of products.
I used to dabble in exotic products - no longer.

I now only buy ETFs/OEICs. I have bought individual company shares on occasion but no longer.
Now I just buy ETFs/OEICs that hold a number of companies.
My largest holdings are IUKD/VUKE+VHYL - 50% of my portfolio.

For drawdown they have no charges for all the things I want to do.
They no longer charge for trading monthly savings - even into ETFs (I buy V3AB).

Vanguard created ETFs some 50 years ago.

[Newroad]

Hi UKMTK.

It was closer to 30 years ago and not Vanguard, for ETF's.

Perhaps you intended the concept of index-tracking?

Regards, Newroad

[ukmtk]

My bad.
Indeed Vanguard invented the index tracker - it seems Mr Bogle was not initially a fan of ETFs (https://en.wikipedia.org/wiki/The_Vanguard_Group).
ETFs appear to date from 1989 (according to wikipedia https://en.wikipedia.org/wiki/Exchange-traded_fund).

[International]

You can lose 100 basis points if you are unlucky swapping an OEIC for an ETF or vice versa. Beware!

I'd had a go at looking at this and I think I see what you mean. In this particular snapshot it suggests that the OEIC->ETF swap would have been favourable at several points in this time period, as the ETF lines are below the OEIC line for much of the month. However it could go the other way too over a different period. For example around March 5th on this chart one of the EFTs pokes its head above the OEIC.

Am I reading that right in this example?

I'd be converting >500K in the first go around so losing 1% would be 5 years of current platform fees! Not the planned saving.

So to mitigate I could:
1) Do things in stages, like dollar-cost-averaging
2) Sell the OEIC, taking note of when I did that. Don't buy the EFT until it has swung below (relatively) what I sold the OEIC for

Even if I stick with OEICs and move to another platform I am still going to do a tidy up so the need to avoid swings in the wrong direction still stands.