When to sell a fund, investment trust or ETF

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In another ISA-focused episode ahead of tax year end, Kyle is once again joined by Dave Baxter, senior fund content specialist at ii, to discuss how to review a portfolio. As well as examining the benefits of rebalancing, we run through key considerations when you’re deciding whether to keep the faith or sell a fund, investment trust or ETF. 

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On The Money, a weekly show that aims to help you make the most out of your savings and investments.

In this episode, we’re going to be discussing top tactics when considering whether to sell a fund, investment trust, or exchange-traded fund (ETF).

Joining me to discuss this topic is Dave Baxter, senior fund content specialist at interactive investor. Dave, welcome back to the podcast.

Dave Baxter, senior fund content specialist at interactive investor: Thanks for having me.

Kyle Caldwell: Dave, first let’s discuss very briefly why it’s harder to sell than to buy. I think some of this is rooted in behavioural finance. There’s that famous quote, ‘the fear of loss outweighs the equivalent pleasure of gain’. Any other thoughts?

Dave Baxter: I think that’s it. It’s psychology, isn’t it? It’s like fear of loss, general caution, and, also, buying something is more exciting. When you’re buying, you’re alerted to these positive trends, or these exciting investment opportunities, and that seems very alluring. You’re doing something new. You’re taking action, whereas selling is less of a glamorous event, I suppose.

Kyle Caldwell: I think there’s also the fear of missing out as well in terms of adding new investments, but also in terms of your existing investments. If it’s been a weak period of performance, you then fear missing out on a potential recovery occurring.

Dave Baxter: Definitely, yeah. The crowd mentality is quite powerful in this space.

Kyle Caldwell: Before we move on to the tactics that we both came up with in terms of considering whether to sell a fund, investment trust or ETF, let’s very briefly cover rebalancing.

This is a very useful way to ensure that the risk level of a portfolio is maintained over time, so that you don’t become overexposed to a particular type of investment theme or sector.

Dave Baxter: Yeah. So, to give an example, say you’ve built your portfolio and you’ve done what used to be the classic balanced portfolio. You have 60% in equities and 40% in bonds. People often carry out rebalancing perhaps something like once a year. So, you might look at your portfolio a year on and say that in 2025 equities performed really well, so you probably would have seen the equity portion increase substantially.

There’s a couple of different ways to do rebalancing. One way is to take some profits, in this case, on those equities and reallocate into bonds, so that you’re back down to 60/40. Another method that’s a bit more incremental, but maybe a bit easier in terms of logistics and trading costs and stuff, is if you’re still investing new money, you could just put the new money into the bonds and then wait until you hit that 60/40 again.

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Kyle Caldwell: Let’s move on to the key things to consider when reviewing a portfolio. Let’s cover funds first.

So, when deciding whether to stick or twist with a fund, I think the first thing to consider is performance, and whether it has outperformed over particular time periods.

But as you’ve mentioned previously on the podcast, Dave, it’s perhaps more useful to think in terms of a particular point in time in the context of the fund’s style rather than looking over at a specific period.

Dave Baxter: Yeah. For me, it’s not always whether a fund has done well. It’s more whether it’s done as I would expect it to do. For example, last year, value funds performed really well. So, if I’m investing in a value fund and it’s had a really lacklustre 2025, you want to ask why that’s happened, and why has it not performed better.

Equally, and people perhaps disagree with this slightly, but if you’re, say, in one of the classic quality funds like Nick Train’s funds, some people would give that a bit more leeway because that style has been struggling. So, to an extent, it’s performing the way you would expect it to.

Kyle Caldwell: But, ultimately, over the long term, you want the fund to outperform the alternative, which is the market. Nowadays, you can buy the market at a very low cost through an index fund or an ETF, particularly if it’s a developed market like the UK, US, or global.

In most funds’ literature, they say, give us a minimum of five years to judge our performance. So, I think that’s an important time period to look at. But you also do want to look a bit longer than that as well.

If a fund has a longer-term track record, make use of all the available data that’s out there, and then make a judgement call on whether you think, in future, the fund strategy or style has the potential to outperform a comparable index.

Dave Baxter: Yep. Consider how it’s performed in different conditions and what it tends to do when markets struggle, when a certain style does well and so on, and that should hopefully give you a rough idea of how it might perform in future.

Kyle Caldwell: The next thing to consider is the fund manager or the fund management team at the helm. First, you need to consider, is the same manager or managers running the money? Because if this is not the case, then ultimately, the shape of the fund and how the fund invests may have changed as a result of that.

Dave Baxter: How convinced on that point are we of the team approach mantra? Because over the years, fund firms have got a bit nervous about big-name managers leaving, and they’ve always started emphasising the fact that it is a team, so if someone goes, then it’s not really of consequence.

Kyle Caldwell: My personal view is that there still should be someone who is at the top of the tree and accountable for performance.

I think it’s fine to have a couple of co-managers running the money, but I think, ultimately, what I don’t want to see is a fund just saying ‘it’s a team approach’, and there are no named managers. I think it’s very important that there’s accountability for performance.

In terms of if the fund manager leaves, it’s not necessarily an instant sell because the new managers put in place may come in and do a very good job.

But I think for me, if I bought a fund and the manager’s changed, I’d certainly do a review. I’d be thinking, where has the fund manager gone? Have they gone to a competitor? And I’d then consider potentially going with the manager if one of the main reasons I bought the fund was because of who the fund manager is.

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Dave Baxter: It’s interesting to look at, say, the fund your in, in the first instance, to see how it changes from manager to manager because sometimes you see that, yes, they are following roughly the same process, but you’ll actually see a decent amount of churn where the new manager doesn’t like this stock and this other stock, and they decide to get out of it. So, it’s worth monitoring how much the portfolio actually changes.

Kyle Caldwell: Agreed. I think fund manager tenure is very important as well. I think if a fund manager’s been in place for 10 years or more, that’s a very good sign. I think that’s a good sign that they’re potentially going to remain at their post, and I think it’s potentially a good sign that their performance has kept them in that position.

Dave Baxter: Although, is it also good, I suppose, to have younger co-managers coming on in time? I think one of the potential drawbacks of being a very experienced manager is that maybe you could argue that it’s easy to not keep up with the times or keep applying approaches that maybe don’t work in different, evolving markets?

Kyle Caldwell: I think that’s where it can work well. If there’s a lead manager who has more experience under his or her belt, and then the co-manager or co-managers are younger and they’re sort of learning on the job and becoming more experienced, and in future, they will potentially take over the funds.

I think that’s a really good sign of good succession planning, and something for investors to consider when a manager does retire.

The next thing to consider is whether the fund is experiencing a significant amount of outflows. Dave, could you explain what this means in practice?

Dave Baxter: Yeah. So, it basically means that on balance, on a net basis, investors are withdrawing more money from the funds than is being put into the funds. This is, of course, an issue for open-ended funds. So, investment trusts have their own problems, but different dynamics. It can become a problem for open-ended fund managers because, basically, investors are asking for their money back and they need it back within a few days.

So, you need to either hold a high level of cash in the fund or you need to sell assets in order to meet those redemption requests. That becomes a problem, particularly if you have less-liquid investments, if you have, for example, smaller companies, that kind of thing, and it partly explains some of problems with the Neil Woodford crisis many years ago.

Also, it’s just problematic because it can force managers to focus on what they can sell. It can force them to sell down winning positions sometimes in order just to deal with this. Yet sometimes it becomes a bit of a vicious cycle in my opinion, and it can lead to, in very extreme cases, the slow gradual demise of the fund.

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Kyle Caldwell: We’ve seen over the years a number of examples of funds that have experienced sizable outflows, and then they’ve really struggled to turn the performance around.

Dave Baxter: Yeah. There’s the performance side, and we talk about this a lot with investment trusts, but it does also apply to open-ended funds, that you can get to a size where you’re not really viable. I mean, with open-ended funds, it just gets to a certain size where, for the fund manager, it’s not commercially viable as they put it, and then the fund will just disappear or it will get merged into some other fund that isn’t always exactly the same thing.

Kyle Caldwell: And, as you’ve mentioned, if a fund is experiencing a high level of outflows, then the manager can often be compelled to sell their most liquid holdings. So, the holdings that are the easiest to sell, and it might not necessarily be the holdings that they actually want to sell. And so, as you mentioned, they can become a forced seller.

Dave Baxter: Yeah. And, also, if you do that, your portfolio over time becomes less liquid because you’re just more exposed to those trickier-to-sell investments.

Kyle Caldwell: Other things to watch out for are whether the style of the fund is the same as when you bought it, and also whether the area of the market that the fund’s focusing on is the same as when you purchased it.

I think sometimes, particularly with, say, a UK small companies fund, you see that when they’re successful and they’re getting money into the fund, it reaches a certain size and then as the fund becomes bigger, the manager becomes more compelled to buy mid-cap companies. They have to move up the market cap spectrum. So, you’re not necessarily getting that sort of pure-play exposure to UK smaller companies anymore.

Dave Baxter: Yeah. You also famously saw this with Fundsmith Equity I Acc when the fund was much smaller. I think they referenced Domino's Pizza Group (LSE:DOM) as a holding that the fund is too big to hold now. In theory, it means that they are holding less growth-y companies than they used to. So, the profile of the fund and what you might expect from it is actually different now than it was 10 years ago.

Kyle Caldwell: Let’s now move on to investment trusts. A lot of what we’ve just said applies to investment trusts, but due to the structure being different from open-ended funds, a key thing to watch out for when you own a trust or when you’re weighing up whether to buy one is the level of premium.

Over the past four, five years, most investment trusts have been trading on a discount, and a pretty heavy discount at that compared to history. As a rule of thumb, I don’t like to see an investment trust premium rise above 5% and certainly not 10%. Because we’ve seen lots of examples, including in more recent times, of high premiums simply not being sustainable.

Dave Baxter: Yeah. Last week, 3i Group Ord (LSE:III), the private equity trust, went to - I mean, it must have at some point in the past - a very rare discount. Then if we think of late 2025, it had been on a premium of as much as 60%. Then there were some concerns about its outlook and the shares have tumbled and tumbled and tumbled. So, if you bought in that really high level, then that just leaves your price quite a long way to fall.

Kyle Caldwell: For investment trust holders, is a potential new item on the list to consider regarding whether to sell an investment trust, whether Saba Capital, the US activist investor, is on the shareholder register?

Dave Baxter: I think, yes. I mean, people have very different personal views on this. Mine is that if you’re already holding a trust and you see Saba get on to the register, then you may as well wait and see because Saba might push for something like a tender offer. Or, what we’re potentially seeing with things like Herald Ord (LSE:HRI) and Edinburgh Worldwide Ord (LSE:EWI), is it might actually take control of the trust if it can, which, again, might give you as a shareholder an exit.

So, you could have a way to get out at a bit of a profit, at least current valuations. But if I were considering investing in a trust for the first time and I saw Saba have been a major investor on the register, it might make me just step back and be a bit cautious because, yes, you could find a profitable way out if Saba forces something like a tender. But is it a bit of a waste of time researching that fund and then having to exit and then go somewhere else?

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Kyle Caldwell: I completely agree. I think if you don’t own the investment trust and you see Saba on the shareholder register, then potentially how that investment trust invests may change in future. As you’ve mentioned, is it then worth the hassle of buying it for it then to be changed in future?

Dave Baxter: I guess if you’re following Saba into investment trusts, you’re almost acting like Saba, and you’re hoping for a short-term gain, which is a valid approach. But if you’re more interested in accessing the theme over the longer term, then maybe you want to go elsewhere.

Kyle Caldwell: So, let’s move on to index funds and ETFs.

Obviously, an index fund or ETF, they don’t have a fund manager, so you’re not going to consider that. There probably is less involved in terms of reviewing your position in an index fund or an ETF, particularly if it’s like a traditional index fund or ETF that’s giving you exposure to a major mainstream market, such as the S&P 500, FTSE All-Share, etcetera. However, there are some things to consider.

One is the composition of the index, how that changes - the allocation to countries, sectors, industries and companies - over time. At this point in time, if you own a global index fund or ETF, you might not be comfortable with how much it has in the US, typically around 70%.

Dave Baxter: Yeah. That’s a big issue, isn’t it? It’s a lot of single country risk in seemingly global products. I think it’s interesting. That’s the most obvious example that jumps out to people, but it’s not the only risk within a conventional tracker fund.

Another obvious one, or obvious two, I suppose, are with MSCI Emerging Markets or Asian trackers. It’s a very exciting region. It’s come back to life in the last year, but there are some very concentrated bets there. Notably China makes up a big chunk of it and now areas like South Korea, and Taiwan.

But also Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM), the chipmaker, which has been a very fashionable stock to hold because of the AI boom and so on in recent years, that makes up, I think, something like 14% of the index. So, that’s just a huge position in itself.

Kyle Caldwell: Other things to think about include the yearly charge that the index fund or ETF levies. Over time, certain fund providers do reduce their fees in the passive fund space. If you’re in an index fund or an ETF that, say, is charging the same as it was 10 years ago, it may no longer be compelling and the cheapest option for you. You might be able to find an index fund or an ETF tracking the same market that is, in percentage terms, quite significantly cheaper.

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Dave Baxter: Yeah. What’s really interesting is that with some of these mainstream trackers, say, like a US global tracker, or any of the mainstream markets, you wouldn’t expect to pay as much as even 0.1%. You would expect to pay less than that in terms of your headline fee.

You might assume with those funds that prices can go no lower and you’ve already got this amazing deal because you’re paying 0.07% or something. But, actually, in recent years, particularly with US and global trackers, you’ve been seeing a massive price war even if it’s cutting by 0.01%.

So, it is worth just keeping an eye on what’s going on and shopping around.

Kyle Caldwell: A couple of metrics that you can look at are tracking error and tracking difference. Without going into the detail right now on the mechanics of both those metrics, one of the most important aspects is the fund fee.

If you have a lower fund fee, you generally tend to have a lower tracking error or lower tracking difference for an index fund or ETF. 

Another thing to consider is how frequently the index fund or the ETF trades. So, look beyond the yearly fee. If you look at the cost disclosure documents for an index fund or an ETF, you’ll be able to see the transaction costs within that document, and that shows the costs for the index fund or ETF, buying and selling, over a particular period. In the case of the document, over a one-year period.

Dave Baxter: Yeah. Also, one useful metric that brings together these different factors is the net returns figure, if you can find it, because that will draw in all those different variables and give you what the outcome has been.

Kyle Caldwell: Dave, thanks for covering all those key points.

Dave Baxter: Thank you for having me.

Kyle Caldwell: And thank you for listening to the latest episode of On The Money. I hope you’ve enjoyed it. In the meantime, you can find plenty of analysis related to funds, investment trusts, and ETFs on the interactive investor website, which is ii.co.uk.

If you have an idea of a topic or you have a question that you would like one of us to tackle, then please do get in touch by emailing:OTM@ii.co.uk. I’ll hopefully see you again next week.