Conventional tracker funds represent a good alternative to ETFs, according to Morningstar’s European passive fund analyst team, especially for buy-and-hold investors seeking to invest for the long term.
There is a multitude of tracker funds that follow equity and fixed income indices in the UK and globally, although Morningstar’s European passive fund analyst team points out the choice is not as large when compared to the menu of exposures available via ETFs.
Ben Thompson, director of business development, listed products and ETF UK for Lyxor agrees that tracker funds are the closest alternative to ETFs, and he cites the major difference as the creation and redemption process.
“ETFs can be bought and sold immediately, just like a stock when markets are open. However, the creation and redemption of a passive fund must be ordered long before being executed, through a long process involving many parties (platform, custody, asset manager).
“Also, because ETFs can be created and redeemed as demand increases and falls, the price of the ETF always remains close to the net asset value of the fund. A passive fund by contrast may trade at a premium or discount to the net asset value.
Mp Thompson says those who prefer a more active approach may prefer to use actively managed funds as an alternative to ETFs offering the potential to outperform the index.
“However, not all actively managed funds do successfully outperform their benchmark index consistently. Those that do one year may not be the same as those that do the following year.
“Plus, the much higher management fees associated with actively managed funds can make them less attractive than a simple ETF tracking strategy.”
Mark Johnson, head of UK sales at iShares, says: “There is currently a trend towards investing in multi-asset index solutions.
“These pre-packaged portfolios use ETFs as building blocks to achieve asset allocation, hence providing an all-in-one way of accessing investment returns from a range of asset classes and global markets.”
