ETFs: The unexplored vehicle for income

When searching for investments to provide income, exchange traded funds (ETFs) could be the solution many have overlooked.

With interest rates remaining low and only expected to rise gradually over the coming years, the desperate search for income continues as a recurring theme for British investors and savers.

But while income-producing funds have topped the bestseller tables in many recent months, some investors still need convincing about using ETFs to produce an income, despite the existence of some attractive products.

ETFs have several advantages for investors who are looking for income, paying out the full dividend or coupon from any stocks or bonds they hold, with most paying quarterly on a pro-rata basis. They are widely available and easily tradeable, allowing investors to buy or sell at any time. Equally, they are a cheap way to gain access to a diversified portfolio of companies. Most investors are familiar with, and often opt for, an actively managed income fund or investment trust. However, these often come with steep fees which can eat away at any gains. Therefore, a well-chosen portfolio of ETFs can be the best solution. 

There are other benefits too. Investors are spoiled for choice when it comes to ETFs with access to almost every asset class across different regions, and many use them to introduce new assets such as commodities into their portfolios.  

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The number of ETFs listed on the London Stock Exchange has increased by over 700 per cent since 2008, and the value of assets under management has now reached a huge $236 billion. In this extremely fast-growing market, Selftrade predicts this figure could grow to $650 billion or more by the early 2020s.

Now with over 1,500 ETF products on the UK market, more needs to be done to educate and build understanding of how to use ETFs, particularly given the large number of new products launched with different propositions and strategies.

To help investors select the right ETFs for their portfolio, Selftrade, the investment platform from Equiniti, has recently launched the ETF Select 100, an independent list of best-in-class ETFs. 

Some of the top performing ETFs in their respective sectors over the last 5 years are (November 2017):

1. Stocks -  PowerShares FTSE UK Hi Div Low Volatility ETF (UKHD)

2. Bonds – iShares UK Government inflation linked bonds (INXG) don’t include commodities 

3. Money Market – Db X-tracker UK Cash (XSTR) 

Ensuring both investors and advisers understand how ETFs work is also vital to their continuing popularity. Every day investors need to be assured that products are safe, understand the difference between synthetic and physical ETFs, and know how these products can generate an income.

As more and more complicated ETFs are launched, it's important to keep sight of the needs of investors, for whom ETFs can be a very useful part of the portfolio, as long as they are clear about their objectives and do what they say on the tin.

Mark Taylor is chief customer officer at Selftrade.

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