Comparing ETFs and index mutual funds

“Both ETFs and traditional mutual funds fall into the category of pooled investment vehicles, which means the funds from many individual investors are pooled together, which gives investors certain benefits, including economies of scale and diversification.”

Intra-day trading

Asking those in the industry what is the main difference between an ETF and an index mutual fund and most point to the intra-day trading an ETF offers.

Ms Perryman believes some investors like the fact that as well as being able to create and redeem units at net asset value (NAV) like a fund, ETFs can be bought via a stockmarket throughout the trading day. 

“This secondary market for ETF shares means an investor can simply buy units of an ETF via their broker and receive a price immediately rather than having to wait until the end of the day for the NAV,” she explains. 

“The ETF secondary market can also provide a second layer of liquidity where if there are sufficient buyers and sellers of the ETF on the exchange then units of the ETF do not need to be created or redeemed (which means that underlying equities and bonds don’t need to be bought and sold), which can be particularly valuable in less liquid exposures.”

Amanda Rebello, head of passive distribution, UK & Ireland at Deutsche Asset Management agrees the most obvious difference is index mutual funds are not listed and therefore do not offer intra-day liquidity.

She says of ETFs: “That intra-day liquidity is important for some investors, and can come into its own in stressed or highly volatile environments – such as post referendum Brexit for example – where quick entry or exit to the market might be needed.”

Seeing that passive investment vehicles have dropped in cost means the adviser can implement an ETF into a portfolio and reduce the overall cost to then keep the portfolio value down. Pollyanna Harper

But Pollyanna Harper, head of UK intermediaries sales at iShares insists liquidity is of less importance to a financial adviser as they are not going to be trading daily.

“However, if doomsday happens you can absolutely get out as soon as you want if you can access them on those types of platforms where they have the intraday liquidity,” she acknowledges. 

“On the flip side, most advisers don’t want to have that option, they’re not going to suddenly jump into cash when a macro event happens. Most platforms will price them in the same way a mutual fund is priced, which means they are in parity with mutual funds, it makes it much more easy to understand and implement.”

Costs