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Newbie question about ETFs

Investment discussion for beginners. Why you should invest your money, get help getting started
LittleWeed
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Newbie question about ETFs

#255525

Postby LittleWeed » October 3rd, 2019, 3:53 am

First post, so please be gentle.

Long time lurker, thinking about starting to invest but having a bit of trouble interpreting the data.

I've been reading with interest all the threads on here about ETFs. When I look on JustETF.com at (for example) Vanguard's VEVE and check out the performance data, in 2016 the return was 29.78%. The dividend paid in 2016 was £0.79, and the unit price varied during that year from £33.69 to £43.73.

I don't understand how those figures relate to each other. Am I missing something obvious? Where does the 29.78% come from? If the "average"price was halfway between £33.69 and £43.73, which is £38.71, then the dividend paid represents 2% of that. Does most of the 29.78% figure represent the increase in value of the units?

Help!

AppleCrumble
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Re: Newbie question about ETFs

#255536

Postby AppleCrumble » October 3rd, 2019, 8:18 am

I'm going to piggyback onto this thread and ask some even more noob questions about ETFs.

What is the difference between ETFs and funds from the personal investors point of view? If I have the choice is there a reason to favour ETFs?

Why doesn't an ETF such as VWRL have accumulation and income classes?

Thanks.

kiloran
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Re: Newbie question about ETFs

#255545

Postby kiloran » October 3rd, 2019, 8:47 am

As far as I can judge from https://www.google.com/search?q=lon%3Av ... e&ie=UTF-8
the price at the end of 2015 was 33.09 and at the end of 2016 it was 41.99.
So the return is (41.99 + 0.79) / 33.09 = 1.29

--kiloran

JohnB
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Re: Newbie question about ETFs

#255550

Postby JohnB » October 3rd, 2019, 9:08 am

Your best bet is to look at monevator.com as they have articles about the merits of ETFs vs funds.

Two key differences are that ETFs are often lumped with shares in brokers' fee structures, so can be much cheaper (free) to hold, and that ETFs can only be bought in integral units, which can be a pain with regular investing if the unit price is £200odd

tjh290633
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Re: Newbie question about ETFs

#255554

Postby tjh290633 » October 3rd, 2019, 9:36 am

AppleCrumble wrote:I'm going to piggyback onto this thread and ask some even more noob questions about ETFs.

What is the difference between ETFs and funds from the personal investors point of view? If I have the choice is there a reason to favour ETFs?

Why doesn't an ETF such as VWRL have accumulation and income classes?

Thanks.

The simple answer is that mutual funds like unit trusts and OEICs are priced once per day, usually at noon, and you don't know the price at which you will buy or sell. ETFs, on the other hand, are bought and sold on the Stick Exchange. Hence you know the price at which you are dealing.

Both are open ended funds, which means that units are created or destroyed according to market demands.

Investment trusts, also known as investment companies, are closed ended which means that their shares are bought and sold on the market. Unless the company decides to buy in some of its shares at a discount, or to issue new shares at a premium, the number of shares in issue remains constant.

Not all funds have both income and accumulation units. Some have both, some only one class. It is up to the managers what they offer. ITs, being normal companies, have a board of directors and normally pay dividends. They have to distribute 85% of their income as dividends but can build up income reserves, which give them more control of their dividend policy. You will see that some boast of up to 50 years of increasing dividends, because of this ability.

TJH

Alaric
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Re: Newbie question about ETFs

#255598

Postby Alaric » October 3rd, 2019, 12:23 pm

LittleWeed wrote: Does most of the 29.78% figure represent the increase in value of the units?



It's a measure of total return. That's the increase in value of the units plus the dividends. Whenever you see a "high" value for this, it's invariably been driven by the increase in value of units.

sloth
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Re: Newbie question about ETFs

#255740

Postby sloth » October 3rd, 2019, 10:32 pm

kiloran wrote:As far as I can judge from https://www.google.com/search?q=lon%3Av ... e&ie=UTF-8
the price at the end of 2015 was 33.09 and at the end of 2016 it was 41.99.
So the return is (41.99 + 0.79) / 33.09 = 1.29

--kiloran

Thankyou.

Lootman
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Re: Newbie question about ETFs

#255746

Postby Lootman » October 3rd, 2019, 10:56 pm

tjh290633 wrote:The simple answer is that mutual funds like unit trusts and OEICs are priced once per day, usually at noon, and you don't know the price at which you will buy or sell. ETFs, on the other hand, are bought and sold on the Stick Exchange. Hence you know the price at which you are dealing.

Both are open ended funds, which means that units are created or destroyed according to market demands.

Personally I do not regard ETFs as open-ended vehicles. I tend to think of ETFs as somewhere between OEICs (obviously open-ended) and ITs (obviously closed-ended)

You are correct that ETF shares are created and destroyed. But the process is rather different than with OEIC's. With OEICs units are created or destroyed in response to direct investor buy and sell decisions. Put another way, you are the only person who ever owns your units. They were created individually for you and are obliterated when you sell them. You can't sell them to another person. Your counterparty is the fund issuer, and if that fund issuer decides it won't trade, as Woodford's fund recently did, then you are out of luck.

ETF shares are created and destroyed, but that is an interaction between the ETF issuer and the authorised participant. The individual investor does not see that process. Rather the individual buys and sells ETF shares exactly like he would with ordinary shares or ITs. The ETF issuer isn't directly involved in that at all, and so the ETF issuer cannot do what Woodford did and block trading. Rather, you are selling your shares to a willing buyer, via an exchange. The shares exist outside of your ownership of them.

And because ETFs always trade they also have some similarities to closed-ended funds, in that if there is an excess of demand over supply or vice versa then that ETF can go to a discount or premium, like an IT. However market arbitrage minimises that in a way that doesn't happen with ITs. Moreover, like ITs but unlike OEICs, ETFs can be shorted, loaned out, may have options listed on them, and so on.

So in my own view ETFs are best seen as a hybrid between open-ended and closed-ended funds, since they share some attributes with both.

Alaric
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Re: Newbie question about ETFs

#255750

Postby Alaric » October 3rd, 2019, 11:19 pm

Lootman wrote: However market arbitrage minimises that in a way that doesn't happen with ITs. Moreover, like ITs but unlike OEICs, ETFs can be shorted, loaned out, may have options listed on them, and so on.


There is a point that the hypothetical content of an ETF is always known which facilitates arbitrage which supports their use as devices for funds that aim to track indexes.

There's a risk factor with the most exotic forms of ETF that markets might dry up. Are there any practical examples of this happening?

BobGe
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Re: Newbie question about ETFs

#257277

Postby BobGe » October 12th, 2019, 3:45 am

JohnB wrote:...and that ETFs can only be bought in integral units, which can be a pain with regular investing if the unit price is £200odd

Halifax Sharebuilder allows fractional holdings.


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