We use a rigorous process when selecting ETFs for inclusion in our clients’ portfolios. The factors we take into consideration are costs, liquidity, the provider and the method of replication – we don’t rule out using smart betas (a choice we have made in the past). One of the problematic aspects of smart betas is that the qualitative-quantitative strategy has a higher cost than normal ETFs and therefore makes it more difficult to justify its use as part of our overall strategy. It should also be emphasised that not all smart betas are considered suitable for private customers (such as those with non-public benchmarks).

Not all ETFs, in order to replicate their reference index, buy all the securities present in an index (so-called physical replication). Some instruments select a sample of stocks that is in this case representative of the index (synthetic replica). In this case, the value of the ETFs can also diverge from the benchmark.

Certainly. ETFs are an excellent tool for investing in commodities thanks to their practicality and efficiency. There are gold ETFs, oil ETFs, water ETFs and a host of other ETFs that invest in different commodities.

Investments held within an Individual Savings Account (ISA), such as ETFs, can offer tax benefits, as any gains made are typically exempt from Capital Gains Tax (CGT) and Income Tax.

However, it’s important to note that this tax advantage applies specifically to ISAs. If you are investing through other accounts, such as a pension, different tax rules may apply. When you eventually draw down from your pension, a portion of it may be subject to taxation.

Tax treatment depends on your individual circumstances and may change in the future.

Much like when you invest with Moneyfarm, the assets an Exchange Traded Fund invests in are ring-fenced and held by a separate custodian. In the unlikeley event that an ETF provider goes into administration, you’ll still have access to the ETF assets you own. ETFs aren’t protected under the Financial Services Compensation Scheme. You cannot claim compensation simply because the value of your investment falls. All investments involve some risk. An index tracker will lose money if the index it is tracking goes down.

The ETF selection process goes hand in hand with the portfolio construction process. Once the weighting of the asset classes in the portfolios have been selected, one or more indices representing that asset class in the portfolio are chosen.

Once the index has been established, the next step is to choose the best ETF on the market that follows that given index. Each ETF is different and, even if it represents the same market index, there can be differences in construction and in performance. The main criteria we consider when evaluating the quality of an ETF are the following, in order of importance:

• Tracking error: The difference between its performance (net of fees) and the performance of the reference index.
• ETF construction: We tend to favor physically relicated ETFs. Occasionally, when factors like liquidity, cost and tracking errors are taken into account, we will choose a synthetic ETF.
• Collateral: Particularly with synthetic ETFs, it’s important to evaluate the securities placed as collateral in the instrument.
• Liquidity: We try to include instruments that are as liquid as possible. This is a determining factor in the riskiness of the instrument.
• Cost: Cost remains a relevant component in the evaluation of ETFs.
• Reliability of the manufacturer: it is important to consider the manufacturer’s reliability and their interest in continuing the ETF business and sponsoring the products they build.

All of these factors are evaluated and monitored over time, with the analyses submitted to the company’s Investment Committee and approved by the Board of Directors.

We invest in ETFs for three reasons: they provide exposure to a broad range of asset classes; have lower costs than actively managed funds; and offer more predictable performance than an actively managed fund.
Managing risk is at the core of our philosophy. ETFs allow us to create an optimally diversified portfolio to manage the risk in our portfolios and our portfolios hold a group of different funds, diversified across geographies and asset classes. A diversified portfolio is better insulated against downside risk and evidence suggests that it’s difficult for active stock pickers to consistently outperform the market over time.

An Exchange Traded Fund (ETF) is a fund that tracks a market index (like the FTSE 100 or S&P 500), a specific commodity, bond, or even a basket of assets. In essence, ETFs own shares and trade them to reflect moves in the index they are tracking. They can be traded exactly like individual stocks, but because they are based on an underlying index or investment, they offer more diversity than individual shares. ETFs charge lower costs than traditional investment funds as they don’t involve active management.

ETFs are a popular low-cost alternative to mutual funds, although they do have a small cost attached to them. On average, you’ll be charged 0.2% per annum for this underlying fund cost at Moneyfarm. This cost is charged by the fund managers and is built into the price of the ETF on any given day. You will not, therefore, see fund charges being deducted from your portfolio directly. This fee can be as much as 1% with mutual funds, sometimes more. Please note, there will always be a fund fee with ETFs, regardless of who you invest with. You’ll also be charged a management fee by Moneyfarm, which is separate to the fund fee. If you invest £20,000 with Moneyfarm, you’ll be charged 0.7% in management fees. In this instance, you’ll pay a total annual management fee of £140 to Moneyfarm directly. The market spread effect also impacts your investments. This is a characteristic of trading on the financial markets and represents the difference between bid and ask (buying and selling) prices for an investment at a specific time. This can be up to 0.09% at Moneyfarm, but you’ll always see the real price you buy and sell assets at.