ETF's v Unit Trusts(or OEIC's) v Investment Trusts

[eyeball08]

Recent well-publicised events involving Mr Woodford have indicated that Unit Trusts have powers to stop/delay access to retrieving ones money in a way not available to most Investment Trust managers AFAIAA.
How do Exchange Traded Funds compare with the other two in this regard?

Is there a simple explanation of the basic differences somewhere on lemon fool?


eyeball

[jonesa1]

ITs and ETFs are traded on an exchange, so all that stops you selling is the availability of people willing to buy and your willingness to accept the price they are willing to pay.

[monabri]

Some discussion here

viewtopic.php?p=238364#p238364

[eyeball08]

Thanks for that jonesa1.
I got the exact answer to an exact question. I am also hoping there is a broader description of the differences somewhere on this site.
Disclosure: I am trying to advise a very bright younger relative of the real differences. I have some experience of tracker UT's, share portfolio and IT's over 30 years or so. I have never owned any ETFs but hear many younger people have been using them in recent years which is probably fine, but I literally don't understand the finer details. e.g. does a tracker ETF literally have to own a large proportion of the shares in that index or is it just linked to numbers in a computer?

The waters also seem to be (deliberately?) muddied by some UTs being described as Open-Ended Investment Companies and some ITs described as Investment Companies. The very good site we know for useful stats for Investment Trusts is the AIC: Association of Investment Companies.

Confused yet? Older folk may remember Soap.....

[eyeball08]

Thanks Monabri
I saw yours after posting my last.

[Alaric]

e.g. does a tracker ETF literally have to own a large proportion of the shares in that index or is it just linked to numbers in a computer?

Both methods exist. If it's described as replicating or sampling then it's a known basket of stocks. If described as "synthetic", it may contain derivative contracts where the counter party will deliver the economic effect of movements in the index. That's more likely in the case of more exotic instruments, something that tracks the price of precious metals being a case in point.

OIECs are just a different or modernised version of Unit Trusts and can be actively managed or just track an index. ETFs, when first introduced, were a variant of OIEC trackers with the added feature that continuous trading was available.

If you bought an OEIC that tracked, for example, the FTSE 100 Index, differences between that and an ETF that did the same would be marginal. They can essentially be considered as comparable products, differences only arising in how you buy and sell, the platform charges if any, and the in extremis case of financial meltdowns.

[mc2fool]

The waters also seem to be (deliberately?) muddied by some UTs being described as Open-Ended Investment Companies and some ITs described as Investment Companies. The very good site we know for useful stats for Investment Trusts is the AIC: Association of Investment Companies.

UTs and OEICs are both open ended investment vehicles but the former is a trust and the latter a company ... how about that!

The practical difference is that UTs have a bid-offer spread whereas OEICs (supposedly) have "single pricing" ... however the OEIC is free to dicker its price to take account of inflows/outflows. Here's a reasonable write up: https://www.sharesmagazine.co.uk/article/investing-in-funds-whats-the-difference-between-a-unit-trust-and-oeic

Re investment trusts and investment companies: an investment company is "a closed-ended fund which invests in a diversified portfolio of assets", and an investment trust is "an investment company which is based in the UK and which meets certain tax conditions so that it doesn’t pay tax on gains made within the portfolio". https://www.theaic.co.uk/aic/glossary/i

So, while all investment trusts are investment companies not all investment companies are investment trusts.

[Aminatidi]

I have read, to paraphrase, that when the [expletive deleted] hits the fan there's a good chance that algorithms trading ETFs will play a large part.

[monabri]

I have read, to paraphrase, that when the Manure hits the fan there's a good chance that algorithms trading ETFs will play a large part.

If so, be ready with cash!

[JohnSmithK]

Etfs are the best option according to me as you get a diverse portfolio for investment purposes whether you invest in technology stocks, healthcare stocks, mining stocks, lithium stocks, etc. the FTSE has shown the fluctuating market in recent days. Some of the top FTSE 100 dividend stocks, Berkeley Group Holdings,Royal Mail etc

[Hariseldon58]

As I have recently experienced, an ETF can suddenly close and liquidate, if it fails to gain sufficient size to be profitable....

Might be prudent to ensure your ETF is of a reasonable size and think about the provider.

Given that the ETF concerned contained a subset of FTSE companies with a record of ‘quality ‘ dividends it was hardly obscure assets !!!

Lyxor if you’re wondering

[EthicsGradient]

OEICs can suddenly close too - it happened to me with the Franklin Biotechnology Fund in 2012: https://www.professionaladviser.com/ifa ... haul-range

Luckily, I had just enough investments that were sitting on capital losses to be able to reduce the capital gain for the year below the annual allowance (at least they did it early in the tax year when I hadn't already taken a gain on any other investment).

Strangely, they had to get shareholder approval to merge other funds (which wouldn't have caused a capital gain), but not if they just wanted to close them down.

[jaizan]

As I have recently experienced, an ETF can suddenly close and liquidate, if it fails to gain sufficient size to be profitable....

I've also had an ETF close, when Deutsche Bank suddenly decided they wanted to reduce derivative exposure.

I've also had one Investment Trust return a large quantity of capital, therefore creating a capital gains event. In this case, it was known the company was going in that direction, however of course I have little control over the timing for capital gains tax purposes.

On balance, I prefer Investment Trusts, as the concept is well established & proven for about 150 years or so. There is the risk of the discount widening, but I prefer that to the risks from ETFs that engage in lending the stock out to third parties and other risky practises.
I suppose they have to do something to make it worth their while when charges are negligible, but I would be more comfortable if this way of operating had a longer successful track record (say 100 years or so).

[hiriskpaul]

ETFs cover a very wide range of assets and investment styles, just as OEICS and ITs do. Stick with the large, vanilla, asset backed ones from established fund managers and you will be fine. Stray into weird areas, leveraged, inverse, swap based, volatility, commodity, etc. and strange things can happen.

ITs can wind up as well. Often this is helpful as it allows investors to get out close to NAV.

[Lootman]

On balance, I prefer Investment Trusts, as the concept is well established & proven for about 150 years or so. There is the risk of the discount widening, but I prefer that to the risks from ETFs that engage in lending the stock out to third parties and other risky practises.

Can you describe and quantify the "risky practice" of securities lending, given that such loans are over-collateralised with government securities?

[jaizan]

Can you describe and quantify the "risky practice" of securities lending, given that such loans are over-collateralised with government securities?

Example: An ETF provider X lends my stock in company Y out to company Z who goes short on company Y. The stock in company Y goes up by 200% and company Z goes bust (with poor shorting decisions as a possible cause), So all the ETF provider has is the government security collateral, which has not gone up by 200%. So as a customer of the ETF, I find it is not performing as it should.
Counterparty risk.

No doubt it will work fine most of the time, but the occasional blow up could be expensive.

[Lootman]

Can you describe and quantify the "risky practice" of securities lending, given that such loans are over-collateralised with government securities?

Example: An ETF provider X lends my stock in company Y out to company Z who goes short on company Y. The stock in company Y goes up by 200% and company Z goes bust (with poor shorting decisions as a possible cause), So all the ETF provider has is the government security collateral, which has not gone up by 200%. So as a customer of the ETF, I find it is not performing as it should.
Counterparty risk.

No doubt it will work fine most of the time, but the occasional blow up could be expensive.

The collateral level is marked to market and is set at a level that exceeds the value at risk. If you think that is flawed then you should worry about every exchange, which basically work on the same principle.

I am not aware of a single instance of stock lending failure, whether with ETFs or any other entity. If you know differently I'd love to hear about the specific case.

[hiriskpaul]

Can you describe and quantify the "risky practice" of securities lending, given that such loans are over-collateralised with government securities?

Example: An ETF provider X lends my stock in company Y out to company Z who goes short on company Y. The stock in company Y goes up by 200% and company Z goes bust (with poor shorting decisions as a possible cause), So all the ETF provider has is the government security collateral, which has not gone up by 200%. So as a customer of the ETF, I find it is not performing as it should.
Counterparty risk.

No doubt it will work fine most of the time, but the occasional blow up could be expensive.

The collateral level is marked to market and is set at a level that exceeds the value at risk. If you think that is flawed then you should worry about every exchange, which basically work on the same principle.

I am not aware of a single instance of stock lending failure, whether with ETFs or any other entity. If you know differently I'd love to hear about the specific case.

I read a paper from BlackRock (sorry, cannot find the link) which said that they have had 3 stock borrowing defaults since they started stock lending in the early 1980s, but each time the default was covered by collateral, so the funds/clients did not suffer failures. I cannot remember whether the stocks were borrowed from ETFs though. BlackRock's stock lending is also used across their other fund types - mutual funds, UTs, closed ended funds, ITs, institutional funds, etc.

Stock lending does not have to be collateralised using government stock. Other securities can be accepted, but higher collateral value is required for inferior quality collateral. There used to be rules for certain markets though, for example gilts used to be required as collateral when gilts were lent.

A properly run stock lending program is marked to market at least daily - actually in real time these days. If at any time provided collateral is insufficient, a margin call will be made or the lent security requested back.

[OhNoNotimAgain]

The clue is in the name.
An ETF is just an open ended fund you can trade on a secondary market.

Unlike an OEIC where you invest directly in or out of the fund, usually once a day, an ETF trader has to find a counter-party.

For investors with time frames in decades the ability to trade at any time of the day might seem unnecessary.

[Lootman]

An ETF is just an open ended fund you can trade on a secondary market.

Unlike an OEIC where you invest directly in or out of the fund, usually once a day, an ETF trader has to find a counter-party.

For investors with time frames in decades the ability to trade at any time of the day might seem unnecessary.

An OEIC requires a counterparty as well. Except in that case there is only one counterparty - the fund issuer. And as Woodford customers have discovered, that counterparty might refuse to trade if things go badly, which is when you would most want to trade.