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How to build an ETF ISA portfolio

Find out how to build a portfolio of ETFs in your ISA.

Important information - investment value can go up or down and you could get back less than you invest. If you're in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

What is an ETF ISA portfolio?

An ETF ISA portfolio is a portfolio of ETFs in a Stocks and Shares ISA

ETFs, or Exchange Traded Funds, are funds which track an index of shares or a commodity. 

Most ETFs track a specific index of shares, such as the FTSE 100 or the S&P 500. These ETFs are passively managed which means the manager only makes trades to ensure that it matches the market it is tracking. This is instead of picking investments to try to beat the market like an actively managed fund. As a result, ETFs tend to have lower costs than most funds.

Other ETFs track the price of commodities, such as gold. These are known as ETCs, or Exchange Traded Commodities. 

You can build an ETF ISA portfolio by investing in a range of ETFs in your ISA. Several ETFs are included in our Super 60 rated list. 

How do ETFs work?

Most ETFs are designed to match the performance of an index, or market, over time. They do this by investing in a range of shares in the market. 

For example, the iShares Core FTSE 100 ETF tracks the FTSE 100. If you invest in it, the value of your investment should go up or down depending on the value of the FTSE 100 as a whole. 

This makes ETFs similar to index tracker funds, such as FTSE trackers. However, unlike such funds, ETFs are traded on a stock market and can be bought and sold throughout the day like shares.

ETFs can also track other asset classes including bonds and property instead of an index of shares. ETCs track the price of a commodities. For example, iShares Physical Gold ETC tracks the price of gold. 

View our top ETFs page for more examples of our most popular ETFs. 

What are the benefits of an ETF ISA portfolio?

Tax benefits

Stocks and Shares ISAs are tax-efficient investment accounts. When you sell investments in an ISA, you do not have to pay Capital Gains Tax on your profits. In contrast, you will have to pay Capital Gains Tax on profits you make over £6,000 in a general trading account

UK dividends are also tax-free in an ISA. 

By buying ETFs in a Stocks and Shares ISA, you ensure that any profit you make will be tax-free. You will also not need to declare your investments on your tax return. 

Reduced risk through diversification

Investing in an ETF which tracks an index of shares can be considered as low risk compared with investing in individual shares. If you were to buy a limited range of individual shares yourself, your portfolio would be at greater risk if one of those companies were to perform badly and fall in value.

An ETF has protection against the poor performance of an individual company as the price is based on the performance of a wide range of shares. However, it is worth checking how many companies an ETF invests in as it can vary. 

An ETF which tracks an index can still fall in value. It is also worth bearing in mind that other types of ETF, particularly leveraged ETFs, can be riskier investments than shares. 

Lower cost and charges

As they are passively managed, most ETFs have low charges. 

For example, the Vanguard S&P 500 UCITS ETF has an ongoing charges figure of just 0.07%. This means the fund manager takes 0.07% of the value of the ETF as a fee each year. By contrast, some actively managed funds have ongoing charges figures which are above 1%.

Over time, high charges can eat into your investment returns. 

Lower cost when investing in international markets

An ETF can be a low cost way of investing in international markets. When you buy international shares, you usually pay higher trading fees and may also need to pay foreign exchange fees. A UK ETF can give you the opportunity to invest in an international index through the UK market.

For example, the Invesco EQQQ NASDAQ-100 ETF tracks the performance of the Nasdaq 100, yet it is priced in sterling and traded on the London Stock Exchange. 

Invest in commodities

You can also use ETCs to gain exposure to commodities. Examples of ETCs available through ii include: 

Investing in ETCs is a way of diversifying your portfolio instead of being reliant on shares. However, commodities markets can be volatile and ETCs are generally considered to be riskier than ETFs. For this reason, they are more suitable for experienced investors. 

Things to consider when building an ETF ISA portfolio

Investment costs and charges

While ETFs tend to have lower charges than most funds, charges will vary between investments. For example, ETFs which track international markets might have higher charges than FTSE trackers as they will incur more costs when buying the underlying investments. 

If you want your ETF ISA portfolio to be low cost, then it is worth checking the product costs of each investment before you buy. 

Fees to buy and sell investments

You should also consider trading fees when choosing your Stocks and Shares ISA provider. 

Many providers charge a percentage fee which rises with the value of your investments. With an ii Stocks and Shares ISA, you will pay a flat fee per month. Depending on the value of your portfolio, our Stocks and Shares ISA fees and charges could save you thousands compared to providers who charge a percentage fee.

How safe are ETF ISA portfolios?

As with any form of investing, there is the risk that ETFs can lose money. There is no guarantee that the index an ETF tracks will rise in value, especially in the short term.

ETFs which track established markets, such as the FTSE 100 or NASDAQ 100, can be seen as less risky than individual shares as the price is based on a variety of companies. However, such established markets can still drop in value.

Other types of ETF may present a much greater investment risk. For example, ETCs are linked to the price of a commodity instead of a market and can be more volatile. Find out more about types of ETF

Leveraged ETFs are a particularly risky investment as they are designed to multiply the profit or loss of the investments. Leveraged ETFs are considered to be ‘complex’ investments and should only be traded by experienced investors.  

Alternatives to ETF ISA portfolios

If you are investing in a Stocks and Shares ISA, you will have a number of investment options available including shares, funds, investment trusts and bonds

If you are looking for a portfolio of low-cost funds, then index tracker funds are an alternative to ETFs. Like ETFs, they track the performance of an index and usually have low fees. The main difference between index tracker funds and ETFs is that funds cannot be traded live through the day.

Read our guide to building an index tracker ISA portfolio to find out more. 


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