ETFs (Exchange-Traded Funds) allow you to invest in a group of assets without you needing to take direct ownership. In fact, ETFs can track virtually any asset class that derives value.
Think along the lines of stocks, indices, bonds, real estate, gold, oil, mutual funds, and even legal marijuana. Crucially, if the ETF generates income (like dividends or coupon payments), you will be entitled to a share of the profits.
In this article, we explore the best five ETF investments for UK traders, alongside the best platforms to do this with.
What are ETFs?
Exchange-Traded Funds (ETFs) allow you to invest in a group of assets via a single trade. The ETF provider will typically purchase the underlying assets on behalf of its investors, meaning that the ETF has real-world value. For example, let’s say that you invested in the previously discussed iShares Core FTSE 100 UCITS ETF.
This means that the ETF provider – iShares, will personally buy shares in the 100 companies that make up the FTSE 100 index. Not only this, but the ETF provider will ensure that the portfolio is correctly ‘weighted’. #
For example, if British American Tobacco stocks make up 2.5% of the FTSE 100, then the ETF provider will ensure that 2.5% of its portfolio contains the same shares. Crucially, by investing in an ETF, you will be entitled to your share of cash flow payments that the underlying assets yield. This includes traditional stocks, as well as bonds.
With that being said, ETFs can be traded on virtually any asset class. A prime example of this is the Horizons Marijuana Life Sciences Index that you can buy at eToro. As the name suggests, the ETF tracks the largest companies involved in the legal marijuana industry – such as growers, distributors, and R&D firms. As such, this allows you to gain exposure to legal marijuana as a commodity via a single click of the button.
What are the advantages of investing in ETFs?
Below, we evaluate the advantages of investing in ETFs:
- Lower costs: ETFs can offer lower costs compared to open-end mutual funds. The reduced administrative costs mean much cheaper expenses
- Instant diversification and flexibility: it is easy to move money between different asset classes and investors can change or transfer their investments quickly.
- Tax efficiency: ETFs have some tax benefits when compared to mutual funds such as less capital gains taxes.
- The ability to purchase with less capital and use leverage: you do not need to own the physical asset for ETF trading and some brokers offer leverage up to 1:10
- Dividend yields: ETFs pay out dividends quarterly. The biggest dividend yields can go up to 28%.
Best UK ETF Brokers
Before you begin investing in ETFs, you will need a good broker so you can invest in the safest, cheapest, and most convenient way possible.
Below, we review our top picks. Our recommended broker is eToro, regulated by the FCA and hosting more than 145 ETFs – all of which can be invested in commission-free. By clicking on the link below, you’ll be able to open an account, deposit funds with a debit/credit card, and buy a UK ETF in minutes.
eToro: Best UK ETF Broker
eToro is a well-regulated broker operating in a number of legislations around the world and counting with 10 million users worldwide. eToro has made a name of itself after its launch in 2006, by offering a very beginner-friendly platform with interactive social and copy trading features.
eToro is regulated by the UK’s FCA and now counts with over 145+ ETFs to trade with high leverage and affordable fees. The minimum required to start trading is $200 (£160) and ETF trading is available on a number of assets.
Assets: Cryptocurrencies, Stocks, CFDs, Forex, ETFs, Commodities
Demo Account: Yes
Educational Material: Great educational material for both beginners and advanced traders
Fees: $5 Withdrawal Fee, $5 Inactivity Fee, No Account Fee, No Deposit Fee
Minimum deposit: $200 (£160)
Special Features: Copy trading and social trading site
Regulation: CySEC, FCA, ASIC, MiFID
Payment methods: Credit/debit card, Paypal, Sofort, Rapid transfer, Skrill, Wire transfer, Neteller, WebMoney, UnionPay” “
- FCA regulated
- High leverage up to 1:10
- 145+ ETFs to trade with 0% commission
- Not suitable for advanced investors
Plus500: Trade on the most popular ETFs
Plus500 is a broker operating in the UK under FCA, CySEC and listed on the London Stock Exchange.
Plus500 offers access to ETF markets with up to 1:5 leverage as well as access to advanced charting tools and technical indicators.
Some of the ETFs you can trade on this broker include the SLV (iShares Silver), LIT (Global X Lithium & Battery Tech) and UNG (UNG-Gas Fund).
Assets: Forex, CFDs
Demo Account: Yes
Educational Material: Limited
Fees: £10 Inactivity Fee, 0 withdrawal fees
Minimum deposit: £100
Special Features: 2,000 trading instruments
Regulation: CySEC, FCA, ASIC, MAS
- Min deposit of £100 only
- Hundreds of ETFs to pick from
- Mobile app available
- Not suitable for beginners
How to Buy UK ETFs – Step-by-step tutorial
Got your finger on the pulse and wish to buy a UK ETF right now? If so, below you will find a simple step-by-step guide.
We have decided to show you the process with our top-rated ETF broker eToro, where we will demonstrate how to invest in iShares Core Dividend Growth ETF. However, the process remains largely the same regardless of which broker or ETF you decide to go with.
Step 1: Open an Account
Firstly, head over to the eToro homepage and open your account. As the UK broker is regulated by the FCA, you will need to provide a range of personal information.
This includes your:
- Full Name
- Home Address
- Date of Birth
- Email Address
- Mobile Number
You will also need to provide a username and a strong password.
Step 2: KYC & Verification
eToro takes its regulatory responsibilities seriously, meaning that you will need to verify your identity before moving to the next step. Don’t worry, the process literally takes a couple of minutes, as you simply need to upload a copy of your UK passport or driver’s license. In the vast majority of cases, eToro should be able to validate the document instantly.
Step 3: Deposit Funds
You’ll be investing in an ETF with real-world pounds and pence, so you’ll now need to deposit some funds. eToro accepts a full range of everyday payment methods – all of which are fee-free.
- Debit Card
- Credit Card
- UK Bank Transfer
Apart from bank transfers, all other deposit methods are instant. Take note, minimum deposits start at $200, which amounts to about £160.
Step 4: Choose an ETF to Invest in
As soon as your deposit is credited, eToro will convert the funds to USD. In doing so, it gives you instant access to dozens of global markets without you needing to constantly worry about exchange currencies. Nevertheless, if you have particular ETF investment in mind, enter it into the search box at the top of the screen. In our example, we are buying the iShares Core Dividend Growth ETF.
If you don’t know what ETF you want to invest in, click on the ‘Trade Markets’ button on the left-hand side of the page, followed by ‘ETFs’. This will allow you to browse the 145+ ETFs hosted at eToro.
Step 5: Complete your purchase
To complete the ETF purchase, you will now need to set up an order.
This might appear somewhat intimidating at first glance. As such, read through the points outlined below before placing your trade.
- Buy Order: Make sure you are placing a ‘buy’ order. If you opt for a ‘sell order’, you are shorting the market, meaning you want the value of the ETF to go down.
- Set Rate: You won’t be able to change the set rate when buying ETFs, so you’ll simply get the next available market price.
- Amount: This is the amount that you wish to invest in USD. In our example, we are investing $500.
Finally, click on ‘buy’ to complete your ETF order. As you can see from the screenshot above, you are buying the underlying asset on a commission-free basis.
Best UK ETFs for 2020
With thousands of ETFs available in the UK market, knowing which one to go with can be challenging. With this in mind, we have narrowed our list of top picks down to just five.
We have also listed the best broker to buy the respective ETF from, as we often find that retail clients are left in the dark when it comes to actually making a purchase.
Crucially, all of the platforms that we discuss are regulated by the FCA, host hundreds of ETFs, and allow you to deposit funds with a debit/credit card or UK bank account.
1. iShares Core Dividend Growth ETF
As the name suggests, the iShares Core Dividend Growth ETF targets blue-chip stocks that pay dividends. The ETF portfolio buys companies that are listed on the two major US stock markets – the NYSE and NASDAQ. Crucially, all of the firms that form part of the ETF have a long-standing track record of paying dividends. Think along the lines of Johnson & Johnson, Microsoft, JPMorgan Chase, Cisco, and Intel.
As such, this is ideal for those of you that are looking for an ETF that pays income. On top of regular dividend payments, you also stand the chance of making money in the form of capital gains. This is where the value of the stocks held in the portfolio increase in value. If and when this does happen, the increase will be reflected in the stock value of the Shares Core Dividend Growth ETF.
If you do like the sound of this ETF, the best online broker to buy it from is eToro. In doing so, you can make an investment on a commission-free basis. This means that the only fee you will need to take into account is the spread. When dividends are distributed by the ETF provider, they will be deposited into your eToro cash account. In terms of the fundamentals, eToro allows you to open an account in minutes, and minimum deposits start at $200 (£160).
You get can get funds into the broker with a debit/credit card, UK bank account, or an e-wallet like Paypal and Skrill. Once you are set up, you can invest from just $25 (£20) into the ETF. This is great, as it allows you to diversify by investing in heaps of different markets. When it comes to the safety of your funds, eToro is regulated on three fronts. This includes the UK’s FCA, as well as ASIC and CySEC (Australia and Cyprus, respectively).
2. Invesco DB Commodity Index Tracking Fund
If you’re looking to gain exposure to the multi-trillion dollar commodity trading industry, it might be worth considering an ETF that tracks the space. At the forefront of this is the Invesco DB Commodity Index Tracking Fund. In a nutshell, the ETF looks to invest in 14 of the most traded commodities. This includes the likes of gold, sugar, corn, wheat, copper, crude oil, gas, and soybeans.
If you do want to invest in the commodities arena, it is important to remember that you will not benefit from the income that stocks and bonds pay. After all, you are investing in the future value of hard metals, energies, and agricultural products – none of which generate cash flows. As such, the best option on the table is to invest in a CFD ETF. For those unaware, CFDs allow you to invest in an asset without you owning the underlying instrument.
Instead, you are merely speculating on the future value of the ETF. This gives you much more flexibility when it comes to setting up a trade. For example, by using our top-rated CFD ETF broker Plus500, you will have the option of going long or short. Regarding the latter, this means that you can speculate on the value of the commodities ETF going down. Moreover, Plus500 allows you to apply leverage.
This stands at 5:1 on the Invesco DB Commodity Index Tracking Fund, meaning that a £500 deposit would allow you to trade with £2,500. In terms of getting started at the broker, Plus500 accounts take just minutes to set up. Deposits start at £100, which you can do via debit/credit card, Paypal, or UK bank account. We also like the fact that Plus500 does not charge any commissions on CFD ETF trades. As such, it’s only the spread that you pay.
3. Vanguard Total Stock Market ETF
An alternative option that you might want to consider taking is the Vanguard Total Stock Market ETF at the broker Markets.com. Much like Plus500, you will be trading ETFs in the form of CFDs, meaning that you won’t own the underlying assets. On the one hand, this does mean that you won’t be entitled to any of the dividends that the stock ETF generates. On the other hand, the ETF is perfect for those of you that wish to engage in short-term trading.
For example, you will get to decide whether you think the ETF will increase or decrease in value. Moreover, you will also get to apply leverage, with Markets.com offering up to 5:1 on this particular ETF. In terms of the underlying make-up of the ETF, this focuses on the wider US stock markets. With that said, just 10 companies make up 22.40% of the portfolio. This includes Microsoft, Apple, Amazon, Alphabet, Facebook, and Visa.
The ETF covers most industries in the US, including retail, consumer goods, health care, technology, and utilities. If you do like the sound of trading the Vanguard Total Stock Market ETF, you’ll pay a spread of just 0.35 pips at Markets.com, with the broker charging no other commissions. Minimum deposits start at £200, and supported payment methods include a debit/credit card, bank account, or Paypal.
The Markets.com trading interface is super-clean, which makes it ideal for those of you that are just starting out in the ETF space. Finally, we should also note that Markets.com has an excellent reputation in the online brokerage arena. The platform was first launched in 1999, and it holds licenses with a number of key regulators. This includes the FCA and ASIC. Moreover, its parent company – Playtech, is listed on the London Stock Exchange.
4.VanEck Vectors Gold Miners ETF
This particular ETF will not be for everyone, as it niches down to a specific industry – gold mining. Launched in 2006 and with a total of $8 billion under management, the ETF strives to track companies involved in the gold mining industry. As many of these companies are listed on smaller stock exchanges, this allows you to gain exposure to an asset class that would otherwise be difficult to reach as a retail trader.
On the flip side, this does mean that the stocks held within the ETF portfolio are much more volatile than larger, blue-chip companies. With that being said, the VanEck Vectors Gold Miners ETF has outperformed the wider markets in recent years – by some distance. For example, annualized performance over the past 1, 3, and 5 years amounts to returns of 59.73%, 16.48%, and 12.02%, respectively.
We should also note that when the value of gold went up by 150% between 2008-2011, the VanEck Vectors Gold Miners ETF increased by 300% in the same period. Crucially, with some segments of the financial markets arguing that a stock market crash is imminent, gold could be a good asset class to get involved with. If this is a strategy that you do like the sound of, the ETF can be purchased via AVATrade.
The platform holds heaps of regulatory licenses, alongside a long-standing reputation in the online brokerage space. You can get started with a minimum deposit of $100 (£80), with debit/credit cards and bank wires supported. We also like the super-competitive fee structure employed by AVATrade. This includes industry-leading spreads and commissions, and fee-free withdrawals. There is no monthly inactivity fee, either.
5. iShares Core FTSE 100 UCITS ETF
Got your heart set on an ETF that exclusively tracks UK companies? If so, it might be worth opting for the iShares Core FTSE 100 UCITS ETF. The ETF seeks to track the FTSE 100 index, which consists of the 100 largest companies listed on the London Stock Exchange. This includes the likes of GlaxoSmithKline, British American Tobacco, Diageo, BP, Unilever, and Rio Tinto.
There are a number of benefits of investing in this particular ETF. Firstly, a significant number of stocks that form part of the FTSE 100 are dividend-paying companies. As such, by using commission-free broker eToro, you’ll be entitled to your share of dividends as and when they are distributed by the ETF provider. Secondly, the iShares Core FTSE 100 UCITS ETF is a great way to diversify across the wider UK economy.
In other words, as your portfolio will consist of 100 individual companies, you won’t feel the full brunt of a stock that underperforms. We should also note that the ETF is highly liquid. This means that you can cash out your gains as and when you like.
Crucially, this ETF would only be suitable if you are bullish on the UK stock markets. If you, you stand the chance of entering the market at a discount, not least because the coronavirus pandemic wiped a large chunk off the FTSE 100 in March 2020.
In summary, ETFs are a great way to gain exposure to a group of assets that would otherwise be difficult to invest in. For example, instead of needing to purchase 100 individual shares, you can simply invest in a FTSE 100 ETF. In doing so, you are buying 100 companies via a single trade.
Similarly, ETFs allow you to speculate on the future value of non-stock assets – such as gold, oil, gas, wheat, and even legal marijuana. With that being said, knowing which ETF to go with can be challenging, not least because there are thousands of options active in the UK market. As such, we hope that our five top picks of 2020 has helped clear the mist.
If you do decide to purchase an ETF, we would recommend doing so with our recommended broker eToro. The FCA regulated platform not only allows you to buy ETFs without paying any commissions, but you can easily deposit funds with a UK debit/credit card or bank account.
eToro: Best UK ETF Broker for 2020
- Invest in bonds, currency, commodity ETFs and more
- Leverage up to 1:10
- FCA, CySEC and ASIC regulated
What does ETF stand for?
ETF stands for Exchange-Traded Fund.
Can I invest in UK ETFs with leverage ?
Yes, but there is a couple of points to note. Firstly, applying leverage on an ETF means that you are trading CFDs, so you won't be entitled to dividends or bond coupon payments. Secondly, UK traders are capped to leverage limits of 5:1 when trading ETFs.
How are dividends paid when investing in UK ETFs?
If you buy an ETF that contains dividend-paying stocks, you will receive your share as and when they are distributed. ETF providers typically do this every three months
What is the minimum deposit amount for investing ETFs?
This will vary depending on the broker you sign up with. Typically, this sits within the £100-£200 range.
What payment methods do ETF brokers support?
You often get to choose from a debit/credit card, bank transfer, or e-wallet.