ETFs vs trusts

Apologies if this question has already been asked and answered elsewhere, but I couldn’t find anything, so here goes…

Why would one want to buy stocks in an investment trust rather than just buying units of an ETF? There are a diverse range of ETFs available in Europe now, and their charges are normally significantly lower than those for investment trusts due to, inter alia, the competitiveness of the ETF market.

A question both in general and to Freetrade in particular: why not just focus on ETFs to provide all the market coverage one could require?

There are some great trusts in the UK - City of London comes to mind but for the meantime I’m buying shares and ETF’s. When Freetrade launches in Ireland I’ll be adding some trusts. I don’t trust DeGiro to handle them and I can annoy all the people here about them! While past performance is not indicative of future results some trusts have an amazing history and their div payouts as well as capital growth.

Maybe someone else can chime in here but AFAIK the reason trusts are good is because they are like a distributing ETF - you get the capital growth and the quarterly dividends. And for you guys with ISA’s this is a great thing. Could be wrong :see_no_evil:

ETFs are required to pay out dividends from securities held, so I don’t think that’s a difference.

Whether an investment is an ETF or trust isn’t a factor I consider in and of itself. (I’m probably exposing my ignorance there!) Key things for me, aside from costs and what they invest in, is that with a trust I also look at the current and historical premium to Net Asset Value (NAV).

For some investment trusts as there isn’t an obvious ETF equivalent (available on Freetrade), e.g. £SMT, £TRIG and £BRSC.

UK-listed trusts also attract transaction costs in the form of SDRT however. I don’t like transaction costs on stock market investments for the same reason I don’t like them when buying property. :blush:

I’m wondering if there are any inherent advantages to the trust structure vs ETFs, or if it’s simply that there are certain profiles of asset allocation that aren’t (yet) well catered for by the ETF market.

Yeah, and then I wonder why.

Why, for example, is £BRSC there, with a TER of 1.1%, but not, eg, the iShares MSCI UK Small Cap UCITS ETF, with a TER of around half that (and no transaction costs when buying)?

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Anders’ answer was spot on. Trusts only make sense for areas that are not covered by ETFs. Fees on trusts are usually so high that even if they slightly outperform an ETF on a similar market/index, you’re better off with an ETF.


I don’t want to be argumentative, so please forgive me if it comes across that way, but the one thing I think Anders missed was a mention of the fact that SDRT is payable when you buy shares in trusts. ETF purchases are SDRT-free, which I think is a key advantage, especially if you value effective liquidity (that is, transaction costs not hampering your ability or willingness to buy and sell).

And then I would be interested to know why Freetrade aren’t offering some of those ETFs - eg, iShares MSCI UK Small Cap UCITS.

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I invest in both ETFs and investment trusts for diversification.

The former are passive, the latter are actively managed and a bit more specialised.

ITs have gearing so can borrow to invest, which could be seen as an ‘edge’ over ETFs but obviously, this also carries more risk.

I tend to invest in ITs when they are showing a discount, although this is not always possible to do, eg both UKW and TRIG are on a premium and likely to be for the foreseeable future.

Appreciate the addition to my comment. SDRT isn’t something I’ve been considering, and I probably should.

Can’t comment on why Freetrade included BRSC first. But, I think it is sufficiently different enough to iShares MSCI UK Small Cap to be included. At small cap level, I’m thinking there should be more opportunity for active funds to find undervalued companies. Time will tell of that makes the extra cost worth it.

Vote for iShare small cap ETF here (please).

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Have voted for CUKS!

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I hold both. A point worth making: some investors favour an active approach in certain sectors such as emerging markets and small-caps.

They would, for example, argue that greater market inefficiencies in emerging markets offers more scope to outperform the benchmark: it may be easier for fund managers to get an edge in terms of information, mispriced securities and so on.

Similar arguments can be made about small-caps. This FT article, for example, says an active approach bucked the trend by outperforming a passive one in the US over the past 12 months.