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Compare Brokers for Investing in ETFs

Use our comparison tables to compare brokers for investing and trading ETFs in the UK. Compare key features like market access, research, added value, commissions and costs.

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Hargreaves Lansdown

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HL Reviews

CEO Interview


Saxo Capital

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Visit Saxo

Saxo Reviews


IG

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IG Reviews

Degiro

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Degiro Reviews


Nutmeg

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dabbl

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Dabbl Reviews

CEO Interview

WiseAlpha

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WiseAlpha Reviews

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Freetrade

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Freetrade Reviews

CEO Interview

interactive investor

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II Reviews

CEO Interview

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AJ Bell Reviews

What are ETFs and how can you trade and invest in them?

Exchanged-Traded Funds (ETFs) are one of the fastest growing areas of the financial markets. Investors like them because they are cheap and transparent, and offer easy access in terms of coverage. Even sophisticated hedge funds trade ETFs because of their deep liquidity.

According to some estimates, assets held by ETFs worldwide have doubled over 2013-2018 to more than US$5 trillion. In Europe, AUM of the entire ETF sector is estimated above $800 billion – a number that is expected to grow further in the coming years.

With ETFs now increasingly popular, investors need to learn how to take advantage of this burgeoning asset class. Broadly speaking,  ETFs offer investors one of the following benefits:

  1. Diversification
  2. Hedging
  3. Income

Which are the best brokers for trading and investing in ETFs?

Here is a quick guide to some of the best UK brokers that offer access to ETFs for trading or investing:

Or you can compare our selection of the best ETF brokers here…

Diversify Your Portfolio With ETFs 

One of the most important uses of ETFs is to diversify your portfolio across asset classes. In the past, you need to buy stocks and gilts separately, topped up with a vault full of physical gold coins. Now, you can easily diversify across different asset classes in a single stock account.

For example, with just five ETFs, you can have a balanced exposure of equity, bond, property, and gold.

  1. iShares FTSE 100 (ISF)
  2. Vanguard FTSE All World ETF (VWRL)
  3. SPDR Barclays 15+ Year Gilt (GLTL)
  4. iShares UK Property (IUKP – holding REITs)
  5. iShares Physical Gold (SGLN)

If you hold another five ETFs, you can gain exposure into mid-/small-cap, emerging market equity, corporate bond, dividend, or sector ETFs. Wonderful, isn’t it?

Of course, the trick now is to allocate capital efficiently across each asset class. This, however, is dependent on investor’s personal views and circumstances.

As a general rule of thumb, the younger the investor the more risk he/she should take. Younger investors should aim for long-term capital appreciation, which may carry somewhat higher risk, such as emerging markets ETFs like Vanguard FTSE Emerging Market (VFEM).

How to use ETFs for hedging

Earlier this year, I discussed hedging market volatility with ETFs (see here).

To recap, when you have a portfolio of shares but do not wish to sell any even though you think the market is toppy, you could buy volatility ETFs. These volatility ETFs go up in value when equity prices fall.

The second way to hedge with ETF is to buy short ETFs. A short ETF moves in the opposite direction to the index it tracks. For example, a 1% drop in the FTSE 100 Index will result in a 1% rise in the short ETF value. Most of these short ETFs are synthetic ETFs.

In the UK, the Xtrackers FTSE 100 Daily Short (XUKS) is one such ETF that offers an inverse performance to the FTSE 100 Index (see below). It rallied from 380 to 430 in the second half of 2018 as the FTSE 100 weakened from 7,700 to 6,700.

A word of caution: Like volatility ETFs, inverse ETFs are not meant for long-term hold – simply because of the way these ETF returns are calculated. They could lose value even when the underlying index is rangebound. Therefore, the holding period of these short ETFs must be short in duration.

Searching For Income Among ETFs

For older investors, the focus would be income. There are several ways to extract income from ETFs. Broad equity-focussed ETFs may not satisfy some investor’s requirement completely because the average yield could be too low. To focus on dividends would require a different composition.

To this end, iShares UK Dividend ETF (IUKD) selects FTSE 350 stocks based on their dividend yields. At the moment, it yields a chunky 6.5%. The only drawback is that high-yielding stocks may perform poorly – hence the high yield (see chart below). If you wish to buy high-dividend stocks from across the world, then Vanguard FTSE All-World High Dividend Yield (VHYL) may suit this purpose.

In the US, dividend aristocrats ETFs – ie, firms paying dividends for many decades – are popular. The SPDR S&P Dividend (SDY) has more than $17 billion AUM.

Apart from equity dividend, bond ETFs could be an area to earn income with relatively low price volatility. In the US, the short-dated bond fund – iShares 1-3 Year Treasury Bond ETF (SHY) – yields about 1.7%. Not too bad considering it holds US Treasuries only. In the UK, because the base rate is low, the payout is much lower. For example, the SPDR Barclays 1-5 Gilt ETF (GLTS) has a yield of less than 0.5%.

To chase yield, investors are more active into corporate bonds, such as the iShares Core £ Corporate Bond ETF (SLXX), which gives a comparatively better yield of around 2.7% (see below).

ETFs have benefitted hugely from the secular shift into passive investing because active funds, despite their high fees, have not really outperformed the general market. So, why pay?

ETFs’ increasing popularity sets in motion a virtuous cycle. More providers move into the market, drawing innovation and providing wider asset coverage – which, in turn, attracts more capital.  ETFs are proven financial instruments that should have a place in every investor’s portfolio.

5 Things To Look For When Buying ETFs

Exchange-Traded Funds are simple to understand. Below are five key factors that you should consider when choosing ETFs:

  1. Providers/Sponsors – Who is sponsoring the fund? These days the ETF industry is concentrated in a few big names. The scale and reputation of these providers should promote long-term stability. However, there are many smaller (niche) providers that are equally good. In the UK, iShares (Blackrock) and Vanguard are two trusted ETF providers.
  2. Underlying (Benchmark) Index – Find out what is the ETF try to achieve. Most ETFs will have an underlying index to track, which may or may be maintained by the ETF provider. Take the iShares FTSE 100 ETF as an example. The underlying index is the FTSE 100 Index, which is calculated by the FTSE Group. This index is then licensed to iShares, which attempts to replicate the returns of the FTSE 100 Index. Some indices could be esoteric and difficult to understand. They should be avoided. Also, if the underlying assets have illiquidity problems, this will result in large tracking errors. Additional questions you should ask:
    1. Equity ETF: Large-, mid- or small-cap? Single country or regional?
    2. Bond ETF: Gov or Corporate bonds? High-Yield (junk) or Investment Grade?
    3. Commodity ETF: Single or multi-sectors? Stocks or futures or synthetic? Roll Yield?
    4. Other questions: Is the ETF priced in domestic or foreign currency? Currency hedged? Where is the fund domiciled? Can it be traded within ISA or SIPP?
  3. Cost – Every fund costs money to run. Management fee, custody, and compliance costs could be considerable. Some ETF providers are more efficient, therefore provide cheaper funds for investors. The thing to look is the Total Expense Ratio (TER), which is the percentage of fund assets used to cover the fund costs annually. This figure will be published by provider for each fund. Avoid funds with high TERs.
  4. Size – Given the large range of ETFs in the market, investors naturally gravitate towards those ETFs that are better known, more efficient, and least costly. Choose larger ETFs as their liquidity/trading volumes are better. Remember that the asset class behind the ETF may also impact the bid-ask spread.
  5. Income – Does the ETF pay any income? Not all does, such as physical commodity ETFs. For many, dividends are paid on a periodic basis (quarterly or semi-annual). Find out more from the ETF’s fact sheet.

As a starting point, I list the Top 20 ETFs below for readers. They all trade on the LSE.

Once you have narrow down a list of ETFs, the next question is: How do you invest in ETFs?

Three Ways to Invest in ETFs

There are many ways to ‘skin a cat’, so to speak. For ETFs, the three investment methods are:

  1. Buy-and-Hold. This method is for investors who aim at long-term income and capital appreciation. This is suited for income-seeking, long-term portfolio builders, and investors that eschew market timing.
  2. Buy-and-Hold with some market timing. For example, you could use the the so-called Ivy Portfolio strategy developed by Mebane Faber to protect your portfolio during bear markets. For instance, the method requires a monthly update on your portfolio holdings to see if the ETF has traded below its 12-month moving average. If it does, sell. An example of this method is given below.
  3. Market Timing. This mean you will trade and churn your ETF portfolio depending on your views and trading methods. Transaction costs will go up if the churn is excessive.

Another point to remember is the weighting of each ETF in your portfolio. You may put more capital into bond ETFs as they are less volatile than equity ETFs.

In conclusion, which method is for you? I can’t tell you this as the answer is inside you already. You just have to find it. In searching for the ‘perfect method’, however, it pays to remember John Bogle’s advice:

Long-term investment success is based on simplicity.*

*John Bogle was the founder of the Vanguard Group. He passed away earlier this month.

List of Top 20 UK ETFs

  1. iShares FTSE 100 (2000) – ISF
  2. Vanguard FTSE 100 (2012) – VUKE
  3. SPDR FTSE All Share (2012) – FTAL
  4. Vanguard FTSE 250 (2014) – VMID
  5. iShares UK Small Cap (2009) – CUKS
  6. iShares UK Dividends (2005) – IUKD
  7. Vanguard FTSE All World Equity (2012) – VWRL
  8. Vanguard FTSE All World Dividend (2013) – VHYL
  9. Vanguard S&P 500 (2012) – VUSA
  10. Invesco Nasdaq 100 (2002) – EQQQ
  11. iShares Core MSCI Europe (2007) – ISEU
  12. xTrackers Stoxx 50 (2008) – XESC
  13. Vanguard FTSE EM (2012) – VFEM
  14. iShares Core UK Gilt (2006) – IGLT
  15. SPDR Bloomberg Barclays 1-5 Year Gilt (2012) – GLTS
  16. iShares Sterling Index-Linked Gilts (2006) – INXG
  17. iShares Corporate £ Bond (2004) – SLXX
  18. Invest Physical Gold (2009) – SGLD
  19. ETFS Physical Silver (2007) – PHAG
  20. iShares UK Property (2007) – IUKP

Where can you trade and invest in ETFs?

Here is a quick guide to some of the best UK brokers that offer access to ETFs for trading or investing:

Institutional ETF (Exchange Traded Fund) brokers

If you are an institutional client you may want a more professional service such as DMA to trade ETFs. If so here is a list of ETF brokers:

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