In the ever-evolving landscape of UK investing, Exchange-Traded Funds (ETFs) have emerged as an accessible, inexpensive and sufficiently diversified product for both novice and seasoned investors alike. These versatile investment vehicles offer a unique blend of diversification, cost-effectiveness, and flexibility that’s hard to ignore. But with the UK market awash with ETF platforms, how does one navigate this sea of choices to find the perfect fit?
Fear not, intrepid investor! I’ve embarked on a journey through the UK’s ETF platform ecosystem, creating accounts, passing KYC checks and rigorously testing every available option. After countless hours of research, trades, and analysis, I’ve distilled my findings into a curated list of the 6 best ETF platforms for UK investors in 2024.
Whether you’re looking to dip your toes into ETF investing or seeking to optimise your existing strategy, this guide is your compass. I’ve carefully evaluated each platform based on a specific set of criteria, ensuring that my recommendations cater to a wide range of investment styles and goals.
So, buckle up and prepare to discover the crème de la crème of UK ETF platforms. From user-friendly interfaces to cutting-edge features, low fees to extensive ETF selections, we’re about to unveil the platforms that stand head and shoulders above the rest. Let’s dive in and explore the best ETF brokers that 2024 has to offer!
6 Best ETF Platforms in the UK
- Invest Engine – Best ETF Platform Overall
- Interactive Investor – Best for Intermediate Investors
- Interactive Brokers – Best For Experienced ETF Investors
- Lightyear – Good for Occasional Investors
- Freetrade – Cheapest ETF Platform
- Saxo – Best for ETF Traders
Disclosure
This article was created to present unbiased opinions after thorough testing of various ETF platforms.
ETF Brokers Comparison Table
| Platform | Pricing | Fees | Number of Available ETFs | Available Investing Instruments | Customer Support | Platform User Experience |
|---|---|---|---|---|---|---|
| Invest Engine | 0.03% for DIY accounts or 0.25% for Managed | No fees for DIY Portfolio 0.25% annual fee for Managed Portfolio. | Over 600 ETFs | ETFs are the primary focus. | Support available | User-friendly and suitable for beginners |
| Interactive Investor | Starts at £4.99/month | £3.99/per trade | More than 1,000 ETFs | Stocks, ISA, SIPP, Funds,Bonds and more | Support available | User Frienly UI without limitations |
| Interactive Brokers | Starts at £1/trade | 0.05% of Trade Value | More than 1,000 ETFs | ETFs, Stocks, CFDs, Options, Metals, Bonds and more | Support available | Perfect for advanced Traders |
| Lightyear | £1/trade for stocks | No fee for ETFs Free for ETFs | About 40 for the UK, 160 in Total | ETFs, Stocks, and Interest on Cash | No Live Support | Simple and easy to use but limited tools. |
| Freetrade | Free and Paid Plans | Commision free trades / 0.45% currency conversion fees | 400 | ETFs, Stocks | No live support | Simple Platform with lack of advance features in free plan |
| Saxo | £3 minimum per share + custody fees | 0.08% | 7000+ | ETFs, Stocks, Bonds, CFDs, Mutual Funds | No live support | Advanced Platform with steep learning curve |
In-depth review of the Best ETF Platforms in The UK
InvestEngine – Best ETF Platform Overall
Pricing: 0.03% for DIY accounts or 0.25% for Managed
Fees: No fees for DIY Portfolio, 0.25% annual fee for Managed Portfolio
Number of Available ETFs: Over 600
Other Available Investing Instruments: ETFs are the primary focus
Customer Support: Support available
Platform User Experience: User-friendly and suitable for beginners
In my opinion, if you truly care about ETF investing, Invest Engine should definitely be on your radar. This is because this platform not only offers but also maintains low fees making it perfect for ETF investors who like to rebalance their portfolios or change strategies.
On top of that, it also offers managed portfolio services.
Available ETFs
The platform boasts a vast range of over 600+ ETFs, which is quite impressive. These ETFs span various sectors and geographies, offering ample opportunities for portfolio diversification. The platform specialises solely in ETFs, and while it may not provide individual stocks or a vast range of other investment instruments, its focus on ETFs allows for streamlined and efficient investment management.
Costs
Invest Engine stands out for its minimal fee structure and transparent pricing. The platform charges no account fees for DIY portfolios and a competitive 0.25% annual management fee for its managed portfolios.
Additionally, it offers tax-efficient accounts like Stocks & Shares ISAs, free from income or capital gains tax, further enhancing its appeal to cost-conscious investors. Notably, the platform doesn’t charge for trading fees, except for the spread, and the annual ETF costs vary depending on the portfolio type, hovering around 0.15% to 0.5%.
Other Features
A unique aspect of Invest Engine is its fractional investing feature, which allows investors to start with as little as £1.
This, combined with its automated investing and portfolio rebalancing services, makes the platform highly accessible, especially for new investors. However, it’s worth noting that the platform’s tools are relatively basic and may not suit investors seeking advanced charting or technical analysis capabilities.
Verdict
Particularly for ETF-focused investors I believe that Invest Engine is an excellent choice. Its low fees and no-cost approach for DIY portfolios are particularly attractive.
While the platform’s focus on just ETFs might seem limiting to some, it offers a simplified and efficient way to diversify investments.
It’s also important to mention that it lacks advanced trading tools and has a limited market reach (primarily the London Stock Exchange) which might be a downside for some more advanced investors. However, for those looking to invest primarily in ETFs with a straightforward, cost-effective platform, Invest Engine certainly stands out.
Interactive Investor – Best for Intermediate Investors
Pricing: Starts at £4.99/month
Fees: £3.99/per trade
Number of Available ETFs: More than 1,000
Other Available Investing Instruments: Stocks, ISA, SIPP, Funds, Bonds, and more
Customer Support: Support available
Platform User Experience: User-friendly UI without limitations
Interactive Investor offers a wide range of investment choices, including stocks and shares, ETFs, investment trusts, bonds, and more. It stands out for offering more than 1,000 ETFs, and 40,000 global shares and funds, covering multiple regions and currencies. The platform is known for its user-friendly design, making it accessible to both beginners and experienced investors.
Available ETFs
It’s not clear exactly how many ETFs Interactive Investor features, but on their ETF page they claim that more than 1,000 ETFs are available. Interactive Investor’s extensive selection includes share ETFs and index ETFs. Interactive Investor also provides access to a list of 60 handpicked ETFs called Super 60, including both active and passive funds, investment trusts and ETFs.
The platform allows investors to access a wide range of ETFs, both from the UK and international markets. This diversity enables investors to create diversified portfolios and align their investments with various market trends, including socially responsible investing.
Costs
Interactive Investor employs a clear, flat fee structure, with monthly plans ranging from £4.99 to £19.99, depending on the account type and investment level. The platform offers several subscription plans, including Investor Essentials, Investor Account, and Super Investor Account, each tailored to different investment sizes and needs.
Trading fees for UK and US shares, including ETFs, are generally £3.99/trade, with other international share trades costing £9.99. Notably, the platform pays interest on cash balances, which is a unique feature.
Other Features
The platform is noted for its research tools, educational resources, and customer support. Interactive Investor offers market analysis and expert insights, making it easier for investors to make informed decisions. The security and reliability of the platform are also highly rated, with advanced encryption and secure login processes in place.
Verdict
From my perspective, Interactive Investor is a top choice for those who seek a wide array of investment options beyond just ETFs.
Its flat fee structure is particularly appealing for active traders, though it might be less economical for infrequent traders or those with small portfolios. The platform’s extensive research tools and resources are excellent for informed decision-making, catering to investors at all levels. Moreover, the positive customer feedback and high Trustpilot score reflect the platform’s reliability and user satisfaction.
Interactive Brokers – Best ETF Platform for Advanced Investors
Pricing: Starts at £1/trade
Fees: 0.05% of Trade Value
Number of Available ETFs: More than 1,000
Other Available Investing Instruments: ETFs, Stocks, CFDs, Options, Metals, Bonds, and more
Customer Support: Support available
Platform User Experience: Perfect for advanced traders
Interactive Brokers is an ETF trading platform that I would recommend to those who are looking to trade ETFs instead of using more passive investing methods like DCA.
Known for its global reach and extensive range of investment options, it offers resources that can significantly enhance the trading experience. The platform is particularly appealing for those interested in diversifying their portfolios through international exposure.
Available ETFs
While it’s not clear how many ETFs are available on this platform after having tested the platform I can say that UK investors have access to an impressive array of ETFs (more than 1,000), including both UK and international options.
This extensive range allows for diversified investment strategies, aligning with various market trends and investment preferences. The platform’s ability to offer access to foreign stocks in over 150 global markets, including a wide range of ETFs, is a significant advantage for portfolio diversification.
Costs
Interactive Brokers’ fee structure is particularly attractive for ETF traders and investors.
For UK users, the commission fees are structured based on the monthly trade value. The fees are calculated in tiers, with lower percentages charged for higher trade values starting from 0.05% and going up to 0.015%.
There’s also a minimum fee per order between £1,00 and £4,00.
Other Features
One of the highlights of Interactive Brokers is its range of trading platforms, catering to different experience levels.
The Trader Workstation (TWS), for example, is ideal for active traders requiring extensive functionality and power. Additionally, the availability of research tools, educational resources, and access to overnight trading are features that I find particularly valuable.
Verdict
In my humble opinion, Interactive Brokers is an excellent choice for UK investors seeking a platform with a global reach and a diverse range of ETFs to actively trade on.
The low fee structure is an attractive feature, particularly for those looking to invest in U.S. markets. However, the platform can be overwhelming for beginners due to its complexity.
The advanced tools offered make it a more suitable option for experienced investors. Nonetheless, the flexibility and the variety of options in plans allow for a tailored trading experience depending on individual investment needs and expertise.
Lightyear – Good for Occasional Investors
Pricing: £1/trade for stocks, no fee for ETFs
Fees: Free for ETFs
Number of Available ETFs: About 40 for the UK, 160 in total
Other Available Investing Instruments: ETFs, Stocks, and Interest on Cash
Customer Support: No live support
Platform User Experience: Simple and easy to use but limited tools
I recently explored Lightyear, a newer player in the ETF investment platform scene.
Lightyear has a focus on ETFs and stocks, and it’s tailored for the long-term investor. The ease of navigating its mobile trading platform, combined with the reassurance of being regulated in both the UK and Estonia, presents a secure and user-friendly investing experience.
Available ETFs
While the official number of their available ETFs is not stated clearly, I counted by hand about 160 ETFs specifically 40 for the UK users.
Lightyear also offers the ability to buy fractional shares but buying fractional ETFs is not possible which is not great for everyday investors.
The platform’s curated selection of ETFs, ranging from sector-specific themes like technology and renewable energy to broad market indices such as the Vanguard S&P 500, offers a strategic blend of investment opportunities.
Costs
What truly sets Lightyear apart is its competitive fee model. The platform champions commission-free ETFs and boasts minimal stock trading fees, capped at a mere £1 for US stocks.
Its currency conversion fees are equally attractive, ensuring investors can manage their portfolios without fretting over excessive costs. Notably, Lightyear maintains a no-fee policy on account management, inactivity, and withdrawals, enhancing its appeal.
However, depositing money in your account will cost you 0.5% for depositing and 0.35% for currency conversion. While this may sound small, if you are DCAing every month these fees could stack up pretty fast.
Other Features
Lightyear’s appealing interest rates on uninvested cash, reaching up to 4.5% for USD and GBP, further enhance its value proposition. Also, the platform’s mobile application is a standout, providing stock information, real-time price alerts, and a seamless interface for managing investments effortlessly.
Verdict
In my exploration of Lightyear, the platform’s dedication to low fees, especially the absence of commissions on ETFs and reasonable stock trading fees, is commendable.
The unique advantage of earning interest on uninvested cash is a thoughtful addition that distinguishes Lightyear.
The platform doesn’t excel in its range of ETFs, and those seeking broader investment vehicles may find it somewhat restrictive.
The mobile app’s functionality and the convenience of managing investments on the move are major pluses. However, the platform’s limited educational resources and lack of live support might pose challenges for newcomers to investing.
Freetrade – Cheapest ETF Platform
Pricing: Free and Paid Plans
Fees: Commission-free trades, 0.45% currency conversion fees
Number of Available ETFs: 400
Other Available Investing Instruments: ETFs, Stocks
Customer Support: No live support
Platform User Experience: Simple platform with lack of advanced features in the free plan
Freetrade is a UK-based fintech startup offering a straightforward and user-friendly platform for trading stocks and ETFs without commission.
The platform is especially appealing to beginners due to its seamless, fully digital account opening process and its highly-rated mobile app. Freetrade emphasises commission-free trading across its product portfolio, which includes a wide array of ETFs among other securities.
Available ETFs
Freetrade provides access to over 400 ETFs, including major ones like Vanguard S&P 500, INVESCO NASDAQ 100, and Vanguard FTSE 1000.
It supports trading on various international stock exchanges, including NASDAQ, NYSE, London Stock Exchange, and several Euronext locations, making it possible to diversify across markets. However, it’s important to note that Freetrade focuses on real stock and ETF trading, excluding CFDs from its offerings.
Costs
One of Freetrade’s major selling points is its fee structure. The platform offers commission-free trading for stocks and ETFs, though it does apply a currency conversion fee of 0.45% for trades in non-GBP currencies.
There are no account, inactivity, or withdrawal fees, but Freetrade offers a Basic Plan for free and two subscription-based plans: Standard and Plus, which cost £5.99 and £11.99 per month, respectively. These plans provide access to additional features and investment options.
Other Features
Freetrade doesn’t offer margin trading, keeping in line with its focus on long-term investment rather than speculative trading. The platform is of course regulated by the Financial Conduct Authority (FCA) in the UK, offering a high level of investor protection of up to £85,000 under the FSCS.
Verdict
Freetrade stands as a simple ETF trading solution and an attractive option for those new to investing or looking for an uncomplicated way to trade ETFs and stocks without worrying about complex fee structures.
The commission-free model is making it one of the most cost-effective investing platforms in the market, although potential users should be aware of the currency conversion fees and the limitations of the free plan.
The platform’s focus on ETFs and the ease of use of its mobile app make it a strong contender for anyone looking to start or simplify their investment journey.
However, experienced traders looking for a broader range of investment vehicles or more advanced research and trading tools might find Freetrade’s offerings somewhat basic.
Saxobank – Best for ETF Trading
Pricing: £3 minimum per share + custody fees
Fees: 0.08%
Number of Available ETFs: 7,000+
Other Available Investing Instruments: ETFs, Stocks, Bonds, CFDs, Mutual Funds
Customer Support: No live support
Platform User Experience: Advanced platform with steep learning curve
Saxo Bank, a premier trading and investment ETF platform, offers a sophisticated yet intuitive interface that I would only suggest to serious investors ideally with a large capital or traders interested in sophisticated trading tools.
With regulatory oversight in multiple countries, it provides a secure trading environment.
Available ETFs
The platform boasts an expansive selection of ETFs (more than 7000 as it’s claimed on their website), enabling investors to diversify across various sectors and geographical regions globally.
This wide array ensures opportunities for strategic portfolio allocation tailored to individual investment goals.
Costs
Saxo Bank’s fee structure is definitely not the most straightforward or the most affordable on this list. There is a £3 minimum per share or ETF or 0.1% transaction fee.
However, it also applies custody fees and higher fees for trading options and futures. The minimum deposit varies by country and their etf commissions are presented on their official website. As I mentioned earlier this is a great platform for traders or investors with larger sums but for smaller investors Saxo would be a bad pick.
Other Features
The platform stands out for its advanced trading tools and features, including detailed charting capabilities and extensive research resources.
Saxo Bank’s platforms, SaxoTraderGO and SaxoTraderPRO, cater to a range of investor needs, from casual traders to professionals.
Verdict
Saxo Bank is suited for investors who value a high-quality trading experience and are willing to navigate its complex fee structure and account requirements. If you are a beginner with smaller capital you shouldn’t even consider using Saxo as other ETF brokers like Invest Engine would make more sense in terms of cost effectiveness.
The bank’s advanced platform and broad market access are significant advantages for those seeking depth in research and analytics. However, potential users should consider the costs associated with higher-end services and the minimum deposit requirement to ensure they aligns with their investment strategy and budget.
How We Picked The Best ETF Platforms in the UK?
Although I am not a finance professional, I’ve been investing in ETFs for years, and I’ve learned a thing or two about choosing the right ones in the UK market. So here is my methodology for picking out the best ETF platform in the UK for all types of investors!
Fees: First things first, I looked at the fees. Let’s face it, we’re all trying to grow our wealth, not watch it disappear into platform charges. I compared the annual account fees, trading fees, and any hidden costs that might sneak up on us. Did you know that according to a recent study by the Financial Conduct Authority, even a 1% difference in fees can reduce your retirement pot by 28% over 40 years? That’s a sobering thought!
Range: I delved into the range of ETFs available on each platform. Variety is the spice of life, and it’s also crucial for a well-rounded investment portfolio. I was particularly impressed with platforms that offered a wide selection of both UK and international ETFs. After all, the world is our oyster when it comes to investing.
User Experience: User experience was another key factor in my assessment. I mean, what’s the point of a platform with great ETFs if it’s a nightmare to use? I looked for intuitive interfaces, helpful educational resources, and research tools. A recent survey by Boring Money found that 42% of UK investors consider ease of use as the most important factor when choosing an investment platform. I couldn’t agree more!
Customer Experience: I also paid close attention to customer service. When you’re dealing with your hard-earned money, you want to know there’s a helping hand available if you need it. I scoured customer reviews and even tested out the support channels myself. Trust me, there’s nothing like a 3 AM panic about a trade to make you appreciate good customer service!
Security: Security was another non-negotiable for me. With cyber threats on the rise, I wanted to ensure that the platforms I recommended had top-notch security measures in place. I looked for things like two-factor authentication and encryption. It’s worth noting that according to the Investment Association, 80% of UK investment firms increased their cybersecurity spending in 2022. It’s clear this is a priority across the industry.
Extra Features: I considered the additional features offered by each platform. Some offer nifty tools like portfolio analysis or automatic rebalancing. While these bells and whistles aren’t essential, they can certainly make your investing journey smoother and more informed.
Remember, the ‘best’ platform can vary depending on your individual needs and investment style. My advice? Take the time to consider what’s most important to you in an ETF platform. Whether it’s low fees, a wide selection of ETFs, or excellent customer service, there’s a platform out there that’s perfect for you.
Creating an ETF Investing Strategy
Let’s start with your investment goals. Are you after long-term growth or regular income? Maybe a bit of both? Your goals will shape which ETFs catch your eye. If you’re feeling cautious, you might fancy ETFs focused on steady, income-generating assets. But if you’re up for a bit more risk, high-growth or niche sector ETFs could be your cup of tea.
Diversification: Diversification is a key perk of ETFs. It’s like not putting all your eggs in one basket. A well-diversified portfolio can help cushion the blow if one area takes a hit. When I’m looking at an ETF, I always check its holdings to make sure they fit with my diversification strategy.
Fees: Now, let’s talk costs. They can really eat into your returns if you’re not careful. The main ones to watch out for are the expense ratio and transaction fees. The expense ratio is a yearly fee, usually a small percentage of your investment. Transaction fees pop up when you buy or sell an ETF. I always hunt for ETFs with low expense ratios to keep more of my money working for me.
Past Performance: Performance is worth a look, but remember, past performance doesn’t guarantee future results. I like to compare an ETF’s historical returns to its benchmark. I also check the tracking error – that’s how closely the ETF follows its underlying index. A lower tracking error usually means the ETF is doing a good job of mirroring the index.
Provider: Lastly, I pay attention to who’s running the show. Established ETF providers with a solid track record can offer peace of mind. They often have the resources to keep costs down and offer a wide range of options.
A recent study by Morningstar found that in 2022, assets in UK-domiciled ETFs grew by 3% to reach £425 billion. Despite challenging market conditions, this growth shows the increasing popularity of ETFs among UK investors.
Remember, choosing ETFs is a personal journey. What works for me might not be the best fit for you. The key is to understand your own needs and do your homework. Happy investing!
You may notice that eToro is missing from this list while many others are mentioning as one of the best brokers for ETF buying. This is because most of these recommendations come from affiliate sites, which means that they get paid a commission every time some clicks on their links. In my opinion, eToro shouldn’t be included in the main list as it falls behind other brokers when it comes to ETF investing.
ETF Investment Strategies
ETFs (exchange-traded funds) offer the simplest way to invest in a diverse basket of assets, but that doesn’t mean there aren’t different approaches we can take.
Buy-and-hold
One popular strategy is the buy-and-hold approach. This involves selecting a core group of broad-market ETFs and holding them for the long term, regardless of short-term market fluctuations. For example, we might choose a mix of UK, US, and global stock market ETFs along with some bond ETFs. The idea is to benefit from overall market growth over many years while minimising costs and tax implications from frequent trading.
A study by Vanguard found that a simple 60/40 portfolio of global stocks and bonds rebalanced annually outperformed more complex strategies over the long run. This speaks to the power of keeping things straightforward.
Factor investing
Another strategy gaining traction is factor investing. This involves choosing ETFs that focus on specific “factors” like value, momentum, or low volatility that have historically led to outperformance. For instance, we might overweight small-cap value ETFs based on research showing this factor combination has produced higher long-term returns.
Core-satellite approach
For those of us who want to be a bit more active, there’s the core-satellite approach. Here, we build a core portfolio of broad-market ETFs (say 70-80% of our holdings) and then add smaller “satellite” positions in specific sectors or themes we believe will outperform. Maybe we’re bullish on renewable energy or see potential in emerging markets – we can express those views through targeted ETF positions.
Tactical asset allocation
One strategy I find particularly intriguing is using ETFs for tactical asset allocation. This involves adjusting our portfolio mix based on economic indicators or market trends. For example, we might shift more into defensive sectors during periods of high volatility. While this requires more active management, some studies suggest it can enhance risk-adjusted returns.
Dollar-cost averaging
Dollar-cost averaging (DCA) is a technique where you invest a fixed amount of money at regular intervals, regardless of market conditions. For example, you might invest £100 in a particular fund on the first of every month. This approach has several advantages:
- It removes the emotional element from investing. Instead of trying to time the market, you’re investing consistently.
- It can reduce the impact of market volatility on your investments.
- Over time, it can lower your average cost per share.
A study by Vanguard found that DCA can be particularly effective during periods of market decline. They compared lump-sum investing to DCA over 12-month periods and found that in falling markets, DCA outperformed 60% of the time.
However, it’s worth noting that in rising markets, lump-sum investing tends to perform better. A separate study by Northwestern Mutual found that lump-sum investing outperformed DCA about two-thirds of the time over 10-year periods.
Asset allocation and diversification
Moving on to asset allocation and diversification, these are two closely related concepts that can help manage risk in your portfolio. Asset allocation involves dividing your investments among different asset categories, such as stocks, bonds, and cash. The idea is to balance risk and reward according to your personal goals and risk tolerance.
Diversification takes this a step further by spreading your investments within each asset category. For instance, within your stock allocation, you might invest in companies of different sizes, from various sectors, and across different countries.
A fascinating study by Vanguard showed that asset allocation explains about 88% of a diversified portfolio’s return patterns over time. This underscores the importance of getting your asset allocation right.
Moreover, diversification can significantly reduce your portfolio’s volatility. A report by BlackRock found that a portfolio split 60/40 between global stocks and bonds had 40% less volatility than a portfolio invested solely in global stocks over the past 20 years.
In my experience, combining these strategies can be incredibly powerful. By using dollar-cost averaging to invest in a well-diversified portfolio with an appropriate asset allocation, you can potentially smooth out market bumps while still capturing long-term growth.
However, it’s crucial to remember that no investment strategy is foolproof. Markets can be unpredictable, and past performance doesn’t guarantee future results. It’s always wise to consult with a financial advisor to ensure your investment strategy aligns with your personal circumstances and goals.
Considerations When Investing in ETFs
Like any investment, ETFs come with their own set of considerations that we should be aware of before diving in.
Cost considerations
One of the primary attractions of ETFs is their low cost. According to Morningstar, the average expense ratio for ETFs in 2020 was just 0.45%, compared to 0.79% for traditional open-end funds. This difference might seem small, but over time, it can have a significant impact on your returns.
However, it’s important to note that not all ETFs are created equal when it comes to costs. Some niche or actively managed ETFs can have much higher expense ratios. A study by S&P Dow Jones Indices found that over the 15-year period ending December 2020, 75% of active UK equity funds underperformed their benchmarks after fees. This underscores the importance of carefully considering an ETF’s expense ratio before investing.
Tracking error and liquidity
Another key consideration is liquidity. While many popular ETFs are highly liquid, some niche or newly launched ETFs might have lower trading volumes. This can lead to wider bid-ask spreads, potentially increasing your trading costs. It’s always worth checking an ETF’s average daily trading volume before investing.
Tracking error is another factor to keep in mind. This refers to how closely an ETF follows its underlying index. A study by Morningstar found that ETFs tracking the FTSE 100 had an average tracking error of just 0.16% in 2020, which is impressively low. However, ETFs tracking more complex or less liquid markets may have higher tracking errors.
Tax implications
One aspect of ETFs that I find particularly intriguing is their tax efficiency. In the UK, most ETFs are structured as Undertakings for Collective Investment in Transferable Securities (UCITS), which can offer tax advantages. For instance, dividend income from UK shares held within a UCITS ETF is not subject to withholding tax, whereas it would be if you held the shares directly.
Understanding ETF structures (physical vs. synthetic)
When I first started investing in ETFs, I mainly encountered physical ETFs. These are what most of us think of when we hear “ETF”. Physical ETFs directly own the underlying assets they’re tracking. For instance, a FTSE 100 physical ETF would actually hold shares of the companies in the FTSE 100 index.
I find physical ETFs quite straightforward. They’re transparent – you can see exactly what the fund owns. According to a report by Morningstar, physical ETFs remain the most popular structure in Europe, accounting for about 80% of assets under management in 2021.
Synthetic ETFs: The Plot Thickens
Now, synthetic ETFs are where things get a bit more complex. Instead of directly owning the underlying assets, synthetic ETFs use financial instruments called swaps to replicate the performance of an index.
At first, I was a bit wary of synthetic ETFs. They seemed more complicated and potentially riskier. However, I’ve learned that they can offer some unique advantages. For example, they can provide access to markets that are difficult to invest in directly, like certain emerging markets or commodities.
A study by the Bank for International Settlements found that synthetic ETFs can sometimes track their benchmarks more accurately than physical ETFs, especially in less liquid markets. This improved tracking can potentially lead to better returns for investors.
The Risk Factor
When it comes to risk, it’s not as simple as saying one structure is riskier than the other. Physical ETFs have counterparty risk if they engage in securities lending (which many do to generate additional income). Synthetic ETFs have counterparty risk through their swap agreements.
However, regulations in Europe have tightened considerably since the 2008 financial crisis. The European Securities and Markets Authority (ESMA) now requires synthetic ETFs to limit counterparty exposure to 10% of the fund’s net asset value and to be fully collateralised.
Performance Considerations
Interestingly, a study by Morningstar found that in some cases, synthetic ETFs have outperformed their physical counterparts. For example, in 2020, synthetic S&P 500 ETFs available to European investors outperformed physical ones by an average of 0.32 percentage points, largely due to more efficient tax treatment of dividends.
However, it’s crucial to note that past performance doesn’t guarantee future results. The choice between physical and synthetic ETFs often comes down to the specific index being tracked and the individual ETF’s characteristics.
Tax Implications
In the UK, the tax treatment of physical and synthetic ETFs can differ. Physical ETFs that distribute income are typically treated as equity investments for tax purposes. Synthetic ETFs, on the other hand, may be treated as offshore funds, which can have different tax implications, particularly for capital gains.
It’s always wise to consult with a tax professional about the specific implications for your situation. The UK government’s website provides some helpful general information on ETF taxation.
Making the Choice
So, how do I decide between physical and synthetic ETFs? I consider several factors:
- The index being tracked: Synthetic ETFs might be preferable for hard-to-access markets.
- Tracking error: Sometimes synthetic ETFs track their index more closely.
- Costs: Synthetic ETFs can sometimes be cheaper due to lower replication costs.
- Risk tolerance: While both structures have risks, some investors feel more comfortable with the transparency of physical ETFs.
In my experience, both physical and synthetic ETFs can have a place in a well-diversified portfolio. The key is understanding how each works and choosing the one that best fits your investment goals and risk tolerance.
As always, I recommend doing thorough research or consulting with a financial advisor before making investment decisions. The world of ETFs is fascinating and full of opportunities, but navigating it with care and understanding is important.
ETF Fees & Costs
When investing in ETFs through UK platforms, you’ll encounter several types of fees. These include annual account or platform fees for maintaining your account, often a percentage of your portfolio value or a fixed amount. Trading commissions are charged each time you buy or sell an ETF. Ongoing fund charges (OCF/TER) are charged by the ETF provider, not the platform, but impact your overall returns.
Foreign exchange fees apply when buying ETFs in a currency different from your account’s base currency. Transfer-out fees are charged when moving your investments to another platform, and some platforms charge inactivity fees if you don’t trade frequently.
Annual Account Fees
Annual account fees vary widely between platforms. Percentage-based fees are common among UK providers, typically ranging from 0.15% to 0.45% of your portfolio value annually. Some platforms charge fixed annual fees, a set amount regardless of portfolio size, which can be cost-effective for larger accounts. Tiered fee structures, where fees decrease as your portfolio value increases, are also common. Some platforms put a maximum limit on their percentage-based fees.
Trading Commissions
Trading fees can negatively impact returns, especially for frequent traders. Fixed per-trade fees are common in the UK, ranging from £3.99 to £11.95 per trade. Less common are percentage-based fees, where platforms charge a percentage of the trade value. A growing trend is commission-free platforms like InvestEngine offering free ETF trades. Some platforms offer volume-based discounts, reducing fees for frequent traders.
Ongoing Fund Charges
While not platform fees, these impact your returns. The TER (Total Expense Rate) typically ranges from 0.07% to 0.75% annually, depending on the ETF. These fees are deducted from the ETF’s performance, reducing your overall returns. Generally, index-tracking ETFs have lower fees than actively managed ones.
Also, here’s something you might not have heard of – the ETF spread fee. It’s the difference between what you pay to buy an ETF and what you’d get if you sold it immediately. It’s usually tiny, around 0.04%, but for frequent traders, it can add up.
Foreign Exchange Fees
These are important for investors buying international ETFs. They can range from 0.15% to 1.5% of the exchange value, often charged as a spread on the exchange rate. Some platforms, like Interactive Brokers, offer more competitive rates.
Other Potential Fees
Be aware of less common charges such as account closure fees when you close your account, paper statement fees for mailed statements, and dividend reinvestment fees for automatically reinvesting dividends.
Tips for Minimising Fees
To minimise fees, choose the right account type for your investment size and style. Consider platforms with fee caps for larger portfolios. Trade less frequently to reduce commission costs, and look for platforms offering free regular investing.
Impact of Fees on Long-term Returns
Fees can significantly erode returns over time due to compounding. For instance, a 0.5% annual fee difference on a £50,000 portfolio could result in over £23,000 less after 20 years, assuming 7% annual growth.
Balancing Fees with Other Platform Features
While minimising fees is important, also consider the range of available ETFs, quality of research and tools, customer service, and user interface and mobile app quality. Sometimes, paying slightly higher fees might be worthwhile for a platform that offers superior features or service that align with your investing needs.
Remember, the best platform for you depends on your individual circumstances, investment style, and portfolio size. Always compare options carefully before making a decision.
Steps to Start Investing in ETFs
Once you’ve decided how, why and how to invest in ETFs, follow these steps to get started:
Choose a platform: Research and compare different ETF investing platforms based on factors such as fees, available ETFs, user interface, and customer support. Depending on your specific needs and investment goals, consider platforms like AJ Bell, InvestEngine, or Hargreaves Lansdown.
Open an account: Visit the chosen platform’s website and follow the account opening process. You’ll typically need to provide personal information, proof of identity, and proof of address. Decide on the type of account you want to open, such as a general investment account, Stocks and Shares ISA, or SIPP.
Fund your account: Once approved, add funds to start investing. Most platforms offer various funding methods, including bank transfer, debit card, or sometimes credit card. Be aware of any minimum deposit requirements or funding fees.
Research ETFs: Use the platform’s research tools and educational resources like JustETF to explore available ETFs. Consider factors such as the ETF’s focus (e.g., geographic region, sector, asset class), expense ratio, historical performance, and tracking error. Many platforms offer screeners and comparison tools to help you narrow down your choices.
Place your first trade: When you’ve selected an ETF to invest in:
- Navigate to the trading section of your chosen platform
- Enter the ETF’s ticker symbol or search for it by name
- Specify the amount you want to invest or the number of shares you want to buy
- Review the order details, including any fees
- Confirm and submit your order
Remember to monitor your investments regularly and consider setting up a regular investment plan to take advantage of pound-cost averaging. As you become more comfortable with ETF investing, you may want to diversify your portfolio further or explore more sophisticated strategies.
Best ETF Platforms for Beginners
Many of you reading this article are probably beginners, so I created a mini list of the best ETF platforms for beginners. My review is based on the critical aspects that matter most to those new to investing, such as ease of use, educational resources, and the overall cost of investing. Here’s my personal take on the top ETF platforms that cater to beginners.
InvestEngine – Best for ETF Beginners
I consider InvestEngine one of the best ETF platforms in the UK for beginners. It strikes an excellent balance between offering investment options and maintaining an accessible platform for those new to investing. The educational resources available here are particularly helpful, guiding users through the basics of ETF investing and helping them make informed decisions.
Freetrade – Best for Cost-Aware Investors
Freetrade is another great pick specifically for beginners. The user-friendly interface combined with zero fees, even in the free plan, makes Freetrade an attractive option for beginners. It’s a straightforward platform encouraging new investors to take the first step into investing without any unnecessary complications.
Lightyear – Good for Occasional Investors
Lightyear’s low-cost structure makes it accessible for anyone looking to start investing without a financial burden. It’s an excellent platform for those who want to dip their toes into the investment world without committing a large sum of money upfront.
In my testing, these platforms have proven to be the best starting points for beginners in the ETF investment journey. Each platform has its unique strengths, whether it’s the cost-effectiveness of Lightyear, the educational resources of InvestEngine, or the enticing zero fees offered by Freetrade. My exploration into these platforms has been enlightening, and they offer a solid foundation for anyone looking to begin their investment journey with ETFs.
Best ETF Platforms for Trading
Some of you might be more interested in trading ETFs instead of investing for the long term. The following platforms (some of them were not included in the main list, as I wouldn’t consider them the best for all-around ETF investing) are great for trading as they offer various tools that can be handy to professional traders, like charting and buying orders or Stop Loss functionality. Some of them also offer CFDs which are preferred by traders due to their flexibility.
XTB – Lowest Cost ETF Trading Platform
XTB provides a compelling choice for ETF traders looking for a user-friendly interface and competitive pricing. Known for its award-winning trading platform, XTB offers access to a vast array of global ETFs, making it a solid option for those looking to diversify internationally.
The platform’s standout features include real-time market analysis, educational resources, and transparent fee structures. With XTB, traders can enjoy commission-free trading on select ETFs, making it an attractive option for both novice and experienced investors.
Saxo – Most Comprehensive Trading Tools
Saxo Bank is a global leader in online trading and investment, offering sophisticated trading tools and access to a wide range of ETFs across global markets.
As mentioned earlier, Saxo stands out for its research tools and detailed market analysis. Although the platform may come with a steeper learning curve, its extensive offerings make it a top choice for traders looking for depth and breadth in ETF investments.
IG – Good Charting Tools
With its user-friendly interface, IG caters to both beginners and experienced traders. The platform provides access to thousands of ETFs across global markets, along with detailed analytics, live data feeds, and advanced charting tools.
IG’s competitive pricing, including low commission fees and tight spreads, makes it an attractive option for those looking to trade ETFs efficiently and cost-effectively.
Why Invest in ETFs?
Investing in ETFs (Exchange-Traded Funds) offers a compelling blend of simplicity, diversity, and cost-effectiveness, making them an attractive choice for both novice and seasoned investors.
ETFs allow individuals to buy into a basket of stocks, bonds, or other assets, providing instant diversification with just a single transaction. This diversification can reduce the risk associated with investing in individual stocks.
Furthermore, ETFs are known for their lower expense ratios compared to traditional mutual funds, meaning investors can keep more of their returns. They also offer the flexibility of trading like a stock, with the ability to buy and sell throughout the trading day at market price, which can be beneficial for those looking to capitalise on short-term market movements.
Additionally, the transparent nature of ETFs ensures that investors have a clear understanding of what they are invested in.
Whether you’re aiming to build a diversified portfolio or seeking exposure to specific sectors, industries, or global markets, ETFs can serve as an essential tool in achieving your investment goals.
Passive vs. Active ETFs
Passive and active ETFs offer two distinct approaches to investing, each with its own merits.
Passive ETFs
Passive ETFs aim to track a specific index, such as the FTSE 100. They’re not trying to beat the market, just match it. I find them appealing because of their lower fees. According to Morningstar, the average ongoing charge for passive ETFs in the UK is just 0.29%. That’s quite cost-effective for gaining broad market exposure.
Active ETFs
Active ETFs have managers who actively pick stocks, aiming to outperform the market. They’re more expensive, with average fees of around 0.86%, but they offer the potential for higher returns.
It’s natural to think that active management would lead to better performance, but that’s not always the case. A study by S&P Dow Jones Indices found that over a 10-year period, 86% of active UK equity funds underperformed their benchmark. It’s a statistic that certainly gives me pause.
On the other hand, active ETFs can shine in certain market conditions, particularly during times of volatility. During the market turbulence of 2020, some active ETFs outperformed their passive counterparts.
Personal strategy
In my own portfolio, I’ve found a mix of both works well. Passive ETFs form a solid, low-cost base, while I use active ETFs for areas where I believe expert management can add value, like emerging markets or specific sectors.
Remember, there’s no one-size-fits-all approach. Your choice between passive and active ETFs (or a combination of both) should align with your investment goals, risk tolerance, and how much you’re willing to pay in fees.
Whichever type you choose, the key is to stay informed and regularly review your investments. Both passive and active ETFs have their place in a well-rounded investment strategy.
How to Buy ETFs
Create an Account: To buy ETFs, the first step is to create an account on your chosen platform, which involves providing some personal information, completing a verification process, and linking your bank account for funding purposes.
Select your ETFs: Once your account is set up and funded, you can navigate through the platform’s interface to explore its wide range of available ETFs. Most platforms categorise ETFs by sectors, geographic regions, or investment themes, making it easier for you to find ETFs that align with your investment goals.
Specify the amount: When you’ve selected the ETFs you wish to invest in, you can specify the amount you want to invest or the number of ETFs you wish to purchase. Many platforms allow for fractional ETFs, meaning you can invest specific amounts and buy fractions of ETFs regardless of the ETF price.
Confirm Buy: After confirming your transaction details, execute the trade. The platform will then process your order and add the ETFs to your portfolio. It’s also advisable to take advantage of the platform’s tools and features for portfolio management and strategic planning, helping you to make informed investment decisions and to monitor your investments over time.
Monitor your Portfolio: Investing requires attention and strategy and that’s why you’ll need to always be aware of changes in the market regime or lookout for better alternatives.
What is the Cheapest Way to Invest in ETFs in The UK?
The cheapest way to invest in ETFs involves several strategies aimed at minimising fees and maximising returns. You can start by picking one of the most affordable ETF platforms mentioned in this article like Freetrade, or Lightyear. But here are some key approaches to reduce your costs as much as possible:
Choose Commission-Free Platforms: Many online brokers and trading platforms offer commission-free trading for ETFs. By selecting these platforms, you can save on the costs of buying and selling ETF shares.
Look for Low Expense Ratios: The expense ratio is an annual fee expressed as a percentage of your investment in the fund. It covers the fund’s operational costs. Choosing ETFs with low expense ratios can significantly reduce your costs over time, especially important for long-term investments.
Opt for No-Transaction-Fee ETFs: Some brokers offer a selection of ETFs that can be traded without transaction fees. While the selection may be limited, investing in these ETFs can help avoid costs associated with frequent trading.
Consider Using a Robo-Advisor: Robo-advisors often offer low-cost ETF investment strategies. They use algorithms to manage your investment portfolio, typically at a lower cost than human financial advisors. Some robo-advisors specifically focus on creating diversified portfolios using low-cost ETFs.
Automatic Investment Plans: Some platforms allow for automatic investing in ETFs, which can sometimes reduce or waive transaction fees. This not only saves money but also encourages a disciplined, long-term investment approach.
Tax Efficiency: ETFs are generally more tax-efficient than mutual funds due to their unique structure and lower turnover rates. Investing in ETFs through tax-advantaged accounts like ISAs or pensions can also help maximise after-tax returns.
Do Your Research: Before investing, compare different platforms and ETFs to find the best combination of low fees, reliable performance, and suitable risk level for your investment goals.
By employing these strategies, investors can significantly reduce the costs associated with ETF investing, ensuring a larger portion of their investment returns contributes to their financial goals.
Buying ETFs with a stocks and shares ISA
You can buy ETFs within a Stocks & Shares ISA, and it’s a brilliant way to invest tax-efficiently.
A Stocks & Shares ISA is like a protective wrapper for your investments (these types of accounts are called “tax wrappers” after all). Any gains or income you make from ETFs held within this ISA are free from capital gains tax and income tax. It’s a fantastic perk that can really boost your returns over time.
Here’s the deal: each tax year (which runs from 6 April to 5 April), you can put up to £20,000 into ISAs. You can split this allowance between different types of ISAs, but many investors choose to max out their Stocks & Shares ISA for its tax benefits.
Most major investment platforms in the UK offer Stocks & Shares ISAs that allow you to hold ETFs. You’ll find a wide range of ETFs available, covering everything from global stock markets to specific sectors or themes.
I particularly like using ETFs in my ISA because they offer diversification at a low cost. For example, I can invest in an FTSE 100 ETF and instantly get exposure to the UK’s largest companies, all while shielding my gains from tax.
Remember, you can only pay into one Stocks & Shares ISA each tax year, so choose your provider carefully. Look for platforms with low fees and a good selection of ETFs.
One last thing – while the tax benefits are great, don’t forget that the value of your investments can still go down as well as up. But for long-term investing, combining ETFs with the tax efficiency of an ISA can be a powerful strategy.
What Happens If an ETF Closes?
A common worry among investors is the possibility of losing their entire investment if an ETF provider, bank, or other party goes bankrupt. Fortunately, regulatory frameworks have been established in recent years to protect individual investors. While these risks can never be completely eliminated, they’re largely theoretical.
ETF Provider Bankruptcy Risk
Like traditional investment funds, ETFs must place their underlying investments with a custodian. The ETF provider can’t simultaneously manage and ‘guard’ the assets. So, if an ETF provider goes bankrupt, your investments aren’t lost because they remain with the custodian.
This separation is mandated by European financial services regulations. In case of bankruptcy, another provider would take over fund management, and your investments would be secure.
Custodian Bankruptcy Risk
But what if the custodian goes bankrupt? In the EU, there’s a series of regulations and protective mechanisms designed to prevent custodian bankruptcies. Even if it does happen, they ensure client assets remain protected. In fact, there’s never been a case in the EU where a significant ETF custodian went bankrupt, though it’s a risk that theoretically exists.
A cornerstone of the EU’s asset protection framework is the requirement for custodians to keep client assets separate from their own. This ensures that in case of bankruptcy, client assets (like ETF holdings) aren’t accessible to the bank’s general creditors and can be returned to their rightful owners.
Custodians are also responsible for any loss of a financial instrument held in custody. They can only delegate their responsibility under specific conditions, ensuring a high level of accountability for asset protection.
ETF Delisting Risk
An ETF being delisted and ceasing to trade on exchanges does happen, especially if they don’t achieve the desired size. In this case, the fund’s assets are simply sold, and you receive the full value of the ETF at that time.
While these risks exist theoretically, the regulatory framework in the UK and EU provides strong protection for ETF investors. It’s always wise to stay informed about your investments, but you can rest assured that multiple safeguards are in place to protect your ETF holdings.
Conclusion
In wrapping up our exploration of the best ETF investment platforms, it’s clear that selecting the right platform is pivotal to your investing journey. We’ve navigated through various options to help you make an informed decision that aligns with your investment goals and preferences.
Remember, while some platforms might come highly recommended, it’s essential to consider your specific needs, including fees, accessibility, and the range of ETFs offered. As the investing landscape continues to evolve, staying informed and adaptable will be key to maximising your investment potential.
Happy investing, and may your portfolio grow with your aspirations!
Capital at risk. This article is for information purposes only and is not investment advice nor a recommendation. You should consider your own personal circumstances when making investment decisions. Past performance is not a reliable indicator of future performance. Tax treatment depends on your personal circumstances and rules can change.
Frequently Asked Question
Which platform is best for ETF?
There isn’t a single ‘best’ platform for ETFs in the UK, as it depends on your individual needs and investment goals. It’s worth comparing fees, ETF selection, and user experience before choosing a platform.
What are the best ETFs to buy UK?
The ‘best’ ETFs depend on your investment strategy, risk tolerance, and financial goals. However, some popular ETFs among UK investors include:
- iShares Core FTSE 100 UCITS ETF: Tracks the UK’s leading index.
- Vanguard FTSE All-World UCITS ETF: Offers global exposure.
- iShares Core S&P 500 UCITS ETF: Tracks the major US stock market index.
- Vanguard FTSE Developed Europe UCITS ETF: Focuses on European markets.
Remember, past performance doesn’t guarantee future results. It’s crucial to research and possibly consult a financial advisor before investing.
Do ETFs go to zero?
While it’s theoretically possible, it’s extremely rare for an ETF to go to zero. ETFs typically hold a diversified basket of securities, so for an ETF to become worthless, all of its underlying assets would need to become worthless simultaneously. This is highly unlikely for broad market ETFs.
However, ETFs can certainly decrease in value, and some specialised ETFs (like those tracking a single commodity or sector) might be more volatile. It’s important to understand the risks associated with any investment.
Is it worth buying multiple ETFs?
Yes, buying multiple ETFs can be a good strategy for diversification. Different ETFs can give you exposure to various markets, sectors, or asset classes, which can help spread risk. For instance, you might have one ETF tracking UK stocks, another for global bonds, and another for emerging markets.
However, be cautious of over-diversification or holding multiple ETFs with significant overlap, as this can lead to unnecessary complexity and potentially higher overall fees.
Can I buy ETFs without a broker?
In the UK, it’s generally not possible to buy ETFs directly without some form of broker or investment platform. ETFs trade on stock exchanges, and you need a brokerage account to access these markets.
