We are entering a new tax year and with it the opportunity to utilise the £20,000 per annum tax-free ISA allowance for a range of financial products.
While investing in mutual funds has long been the strategy of choice for investors since the creation of these financial products some 70 years ago, today, the rise of exchange traded funds (ETFs) is providing investors with greater choice and is helping to revolutionise investment.
Indeed, since their introduction more than two decades ago, the industry has grown at a phenomenal pace. At the end of 2018, the total value of ETFs held globally was approaching $5 trillion. While bond ETFs are set to reach a landmark $1 trillion.
Commonly referred to as passive investing, ETFs track an index such as the FTSE 100 and are listed and traded on a stock exchange, much like stocks. Now widely available as part of ISA investments, but attracting no stamp duty, ETFs provide exposure, in one single order, to a wide range of asset classes and markets.
They are also cost-effective, offering the lowest annual charges of all collective investment schemes. And at a time of economic and geo-political uncertainty, ETFs help diversify portfolios and spread risk.
London Stock Exchange is Europe’s leading venue for exchange traded products with over 1,700 different products available in multiple currencies, including fixed income and emerging market ETFs. Because ETFs are listed on stock exchanges, their prices are simple to find and understand.
Investors are also able to monitor the real time value of an ETF and can trade in or out of it throughout the market day. 72 new products listed on London Stock Exchange in the first three months of 2019, reflecting the ongoing growth of the market.
ETFs can provide an effective vehicle to reach opportunities in emerging markets that they wouldn’t otherwise be able to access. For example, funds tracking China A-shares, that were traditionally reserved only for mainland Chinese investors, are available as well as those with a targeted regional focus. The ability to track an asset class, such as real estate or infrastructure is another advantage.
The vast range of products available also enables investors to pick funds based on desired outcome, from growth to income, but also objectives such as sustainability.
ETFs have become an efficient way to access equity or bond portfolios for which environmental, social and governance (ESG) factors have been integrated into the investment process. Through ESG-based indexes, companies are measured against a range of sustainable metrics.
Public awareness of environmental issues has never been greater and asset managers and pension funds are increasingly choosing to incorporate sustainable investment objectives into all aspects of their portfolios.
Besides the collective responsibility to act on climate change, the green economy also represents a significant investment opportunity - equating to almost $4 trillion in market capitalisation.
This has meant greater choice for investors wanting to tap into the green economy. A total of 28 new ESG ETFs listed on London Stock Exchange in 2018, marking a considerable increase on previous years. While misconceptions that ESG factors in a portfolio impact on performance still exist, there are many examples of funds that offer similar or better performance.
Despite extraordinary growth in ETFs in recent years, actively managed mutual funds still make up the lion’s share of the asset management industry. Yet, with passive investment strategies continuing to grow in popularity and an increasing amount of choice available to investors, competition for fund flows remains fierce and pressure on fees is growing.
With the new tax year already upon us, it’s therefore timely to consider the benefits and efficiencies that ETFs could offer as part of an investor’s portfolio.
If you’d like to find out more about ETFs, London Stock Exchange has a dedicated online resource as well as a full database of all the ETFs available on its markets. Visit: www.lseg.com/etfs