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How to Buy ETFs

How Should You Buy an ETF?

If you want to know how to buy ETFs in the UK, read my guide below as you can invest in ETFs in one of a number of ways.

If you’re young and you are beginning to contribute to retirement accounts, then you should consider investing in ETFs through either a stocks and shares ISA or a SIPP.

These two accounts (should) offer access to many different ETFs, and they are the type of accounts that cater to the goals of an ETF investment: sustainable, long-term growth.

Starting with an ISA or SIPP is important because these allow you to make the most of your tax-free savings and investing. Unless you have an exceptional circumstance, you should be maximising those contributions first.

Ready to invest? Why not check out my top ETFs to buy today

5 steps to buying ETFs UK

Here are my 5 steps to buying ETFs in the UK

1. Open a share dealing account

You will need a brokerage account to buy ETFs. This can easily be done online.

Elements to consider when choosing an account include:

  • Range of financial markets and asset classes available
  • Access to your chosen ETF that you want to buy
  • Fees and commission, including account fees, withdrawal fees, and inactivity fees.

2. Find and compare ETFs

Once you’ve opened your account, you need to decide what ETFs to buy. My guide is a great place to start in finding some of the most popular ETFs.

3. Place your trades

Buying ETFs is very similar to buying stocks. You will need to access the trading section of your brokerage website, find the ETF you would like to invest in, and buy units in it.

4. Choose the number of units you would like to buy

It is always best to double-check any number you type in – you don’t want to end up with 1,000 units even though you only intend to buy 100.

5. Confirm your purchase

You can view your ETF’s performance easily on your brokerage’s website or by typing it into Google.

How much should I invest before starting an ETF?

The amount you can currently invest in an ISA or a collection of ISAs is currently £20,000 per annum.

The amount you can invest in a SIPP is 100% of your annual earnings with a maximum of £40,000.

Once you reach your tax-free contribution limits, you can then invest in ETFs through a normal investment account or dealing account offered by a broker.

How to Choose an ETF

As with all investments, there’s no one-size-fits-all mechanism available to you to suggest the right ETF.

Although ETFs have the distinct benefits of being low-risk investments, choosing the right ETF still has multiple components. You won’t be buying or selling individual assets, but the assets in the bundle still need to be suitable for your goals.

Before diving in, it’s worth noting that the vast majority of ETFs in the UK come from the same few providers. iShares is currently the largest provider of ETFs in the UK.

How Do Investment Goals Play a Role in Your Choice?

Like any investment decision, you need to start your research by first identifying your goal for the purchase. The rules of thumb differ for ETFs compared to other assets because of the number of options available to you and the long-term scope of the investment type.

Like most investments, you start your selection by identifying your primary goal (long-term wealth, income generation, short-term market movements) and your risk appetite.

If you already have a portfolio, start by asking yourself the following questions:

  • Why do you want to invest in ETFs?
  • Is your goal to diversify your portfolio?
  • How do you want to diversify your portfolio?
  • Are you looking to lower your costs?
  • How much are you considering investing?
  • When do you hope for a return?
  • What can you invest knowing you should leave money in an ETF for at least 5 years?

Your goal is to find an ETF that tracks an index related to your investment strategy and offers a cost that suits your goals.

How to Choose the Right Index for Your Goals

With your risk appetite in mind, your first stop on your journey is to choose the correct index, one that matches your goals. It’s the index, not the investment bundle, that defines the proposition offered by ETFs.

Unfortunately, there are 1.5 million indices to choose from. Expect to spend the majority of time allocated to researching your preferred index and then looking at the ETFs themselves. Although there are a huge number of ETFs out there, the vast majority are overseen by just a handful of providers, like iShares, Vanguard, and Blackrock.

When starting the search for your index, a good rule of thumb is to follow an index that covers as much of your target market as possible.

The FTSE All-Share index is a good example. The index tracks a whopping 98% of the UK stock market, which gives you very broad access to investable equities in the UK markets.

As you can imagine, broad market indices represent the best diversification opportunities. When an index focuses on a particular country, industry, or firm, it comes with a greater risk.

If you’re new to indices in the UK, start with these major indices:

  • FTSE 100
  • FTSE 250
  • FTSE 350
  • FTSE All Share
  • FTSE AIM 50 Index
  • FTSE AIM All-share

Those interested in US products should start with the S&P 500.

What Other Factors Are Involved in Choosing an ETF?

Once you choose your preferred index, you can then decide whether a physical or synthetic ETF best suits your needs.

However, there are still more decisions to make. You’ll need to weigh up:

  • Providers
  • Domiciles
  • Currencies
  • Fees
  • Dividend treatment

Your preferences are likely to be as specific as you are, but if you choose the right index in the first place, then you are more likely to find greater success as you work down the list.

What Asset Classes Are Available?

You can buy ETFs in most corners of the market, and that’s reflected in the asset classes and categories available to you. You can buy:

How Much Do ETFs Cost?

Your provider deducts fees from your account, and these fees can be vastly different depending on the provider. While ETFs are less expensive than mutual funds, not all ETFs are considered to be ‘cheap.’

The fees associated with ETFs are typically low because ETFs don’t require active management. However, they do still exist. You may pay costs like bid/offer spreads as well as brokerage fees.

Remember that the cheapest fees are almost always for synthetic ETFs, but they also come with the associated risks.

What are the advantages of buying ETFs?

  • Easy to trade – You can buy and sell ETF units throughout the day.
  • Transparent – Most ETFs need to publish their holdings daily for investors to view.
  • Tax-efficient – You can hold ETFs in an ISA. This means you can invest up to the ISA allowance (£20,000 in 2022/23) and any returns your ETF investments generate will be entirely free from Income Tax and Capital Gains Tax (CGT). Any dividend stocks in the fund will also be free from Dividend Tax.
  • Very low cost – ETFs are typically much cheaper than traditional mutual funds, as there’s generally no fund manager to compensate for selecting or managing investments.

Are there any disadvantages of investing in ETFs?

  • Trading costs – Since ETFs are not purely passive products, they do have costs associated with them. This is usually a small percentage-based fee.
  • Illiquidity – Some ETFs may have wide bid price and ask price spreads. This could result in you buying at the high price of the spread and selling at the lower end.
  • Tracking errors – Sometimes technical issues may cause discrepancies in the value of the ETF and the index it tracks. This may mean you don’t see the same level of returns you might have been expecting.
  • Settlement dates – ETF sales are not settled until two days after the sale. This means you will not be able to reinvest your money until two days later.

How to Buy ETFs FAQs

How do beginners buy ETFs?

Buying ETFs as a beginner is a simple process that can be done online through a brokerage account. You will need to provide personal information and answer some questions about your investment goals and risk tolerance. Look for ETFs that have low fees and track indexes that you believe will perform well.

How do I buy an ETF in the UK?

Choose a brokerage firm that offers ETF trading in the UK. Some popular options include Hargreaves Lansdown, AJ Bell, Interactive Investor, and Vanguard UK. Once you have chosen an ETF, place an order to buy it. You will need to specify how many shares you want to buy and at what price.
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