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What is an ETF?
Our ‘What is an ETF page’ gives more detail on this but in simple terms, an ETF is a portfolio of stocks that we can purchase in one transaction. Buying an ETF is just as simple as buying a single stock but you can receive the diversification benefits of investing in hundreds of stocks at a low cost.
How do you invest in ETFs?
Investing in ETFs has become much simpler with the use of the internet and online trading platforms. You can invest in ETFs using a reputable investment platform such as Vanguard, if you want to learn more about investing in ETFs and how to actually take your money from your bank account sign up for one of our free courses?
How long does an ETF investment last?
One of the great things about ETFs is that you can sell them whenever you want to. That means if you invest £20,000 in an ETF and you decide you need this money for something else, you can sell your investment for a relatively low cost. These costs depend on the investment platform that you use and typical examples can be found of what costs to invest when signing up for one of our free courses.
How risky is investing in ETFs?
Investing in an ETF is the same as buying tiny shares in the companies that are listed in them. For example, if you buy an ETF on the S&P 500, you are investing a small fraction of your money in companies like Disney, Netflix, Amazon, Apple, etc. If you believe that these companies are likely to make money in the future, then you can expect a return on your investment. Typically, investing in the S&P 500 has yielded around 8% on average but it is important to remember that at certain points in time, large falls and gains can be seen. For this reason, passive investment strategies generally tend to suit investors with a long-term outlook as it is less likely that you will lose money over the long term but more likely that your investment will fluctuate over time.
What are the taxable liabilities of ETFs (United Kingdom)?
Capital gains tax
When you decide you are ready to sell your investment, or if you are looking to switch funds, you will pay capital gains tax if you make a profit. In the UK for 2021.22 the capital gains tax allowance is £12,300, giving you a nice buffer if you make a profit. It is important to note that any losses (even from previous years) can offset gains.
Tax on Dividends
If any of your investments pay dividends, then there is a tax-free dividend allowance of a slightly less generous £2000 per year. Dividends are taxed at different levels depending on your tax bracket and range between 7.5 and 38.1%. It is important to seek advice from a qualified accountant before making investment decisions.
Is my money in ETFs secured?
Investing in stocks is risky, while we believe ETFs are a good way to diversify risk, it is still possible that you could lose all or some of your investment, you have to be careful about which ETFs you invest in. For beginners, it is generally safer to invest in larger index funds such as the S&P 500, or the FTSE 100, as this is equivalent to owning a small fraction of tiny funds.
Are there different types of ETFs?
There are hundreds of different types of ETFs, passive ETFs generally track the large stock exchanges such as the S&P 500 or FTSE 100, other ETFs can follow investment strategies or industries. Learn more about ETFs in one of our free courses.
