Shares from Uncle Sam

When it comes to investing, we are still quite naive compared with our counterparts in the US. How else do you explain the fact that we pay far more to invest in unit and investment trusts than Americans pay for their mutual funds?

When it comes to investing, we are still quite naive compared with our counterparts in the US. How else do you explain the fact that we pay far more to invest in unit and investment trusts than Americans pay for their mutual funds?

Initial charges may be coming down in price but management fees remain high - 1.5 per cent per annum is common. However, the arrival of Exchange Traded Funds (ETFs) could lead to a reduction in overall charges. A hybrid of a unit and an investment trust, an ETF is open-ended so there is no limit on the amount which can be invested in it. It operates as a listed company in the same way as an investment trust, but tracks an index.

The only ETF available to UK investors at the moment is the iFT-SE 100, from Barclays Global Investors (BGI). Known as an iShare, it tracks the FT-SE 100. Investors buy it as they would any other share, but risk is reduced as the iFT-SE invests in every company listed on the FT-SE, rather than opting for just one stock.

"Investors are buying immediate exposure to the market and because it's a share, iFT-SE is accessible to everyone," says Malcolm Smith, iShares product manager at BGI.

There is now more than $40bn invested in iShares, which were launched in the US in 1993. BGI is planning to develop further iShares tracking different indices, and will launch a technology iShare later this year. Other UK fund managers are expected to offer ETFs soon. As more are available, they are likely to increase in popularity with a fund for every portfolio and every type of investor, as with unit and investment trusts.

"IShares have taken off quietly but that's not surprising because a lot of people don't know about them or understand them," says Justin Urquhart-Stewart, director of Barclays Stockbrokers. "However, when we see a range of products available they'll be excellent investment tools."

ETF charges are significantly lower than those for traditional unit and investment trusts. The annual management fee for the iFT-SE is 0.35 per cent, while there is no initial fee, unlike many funds which carry a 5 per cent one-off charge.

"In principle, you could find tracker funds as cheap or cheaper than iShares," says Michael Owen, director of independent financial adviser (IFA) Plan Invest. "However, for many of our clients to whom we recommend a tracker fund, I would see iShares as competing head on. It looks as though ETFs will be interesting products, although it is still very early days."

The iFT-SE is also attractive to investors because it is exempt from stamp duty, owing to the fact that it is domiciled in Dublin. In addition, ETFs can be traded at any time of the day, unlike ordinary shares, and investors know exactly what price they are trading at. Unit and investment trusts, on the other hand, are only valued once a day; it could take several days for you to contact your broker to tell him or her that you want to sell, by which time you could have lost out due to movements in the market.

Although ETFs will compete directly with unit and investment trusts, they are unlikely to threaten their survival. "ETFs are not going to rob all business from traditional mutual funds," says Will Kinsman, senior marketing manager at telephone and online stockbroker Charles Schwab Europe. "I think they'll complement rather than replace mutual funds, and investors will benefit as more attention will be focused on charges, which are likely to come down."

Investing directly in stocks and shares is the riskiest form of investment, one many people are not comfortable with. ETFs could change this as the risk will be more like that of a unit or investment trust.

It will take time for ETFs to become established in most investors' vocabulary. However, as more fund managers launch them, they are likely to become a familiar part of the investment scene.