Fees
The short answer: ETFs and index funds both aim to track a market at low cost. Active funds try to beat the market and charge more to do so. Which is right for you comes down to cost, how “hands-off” you want to be, and whether you believe paying more for active management is worth it.
Capital at risk. The value of investments can go down as well as up and you may get back less than you invest.
| ETF | Index fund | Active fund | |
| Goal | Match an index | Match an index | Beat an index |
| Pricing | Live, intraday | Once a day | Once a day |
| Typical ongoing cost | Low | Low | Higher |
| Holdings transparency | Usually daily | Periodic | Periodic |
| Trades like a share | Yes | No | No |
| Relies on the manager's skill | No | No | Yes |
ETFs and index funds are both passive, meaning they follow a market rather than trying to outguess it. Their appeal is simple: low cost and broad diversification. Active funds aim to outperform the market, which can pay off, but they charge higher fees whether or not the manager succeeds.
This matters because costs compound. Long-running studies – including the FCA’s Asset Management Market Study and the regularly published SPIVA scorecards – have found that, after fees, the majority of active funds fail to beat their benchmark consistently over the long term. That doesn’t mean active never works; it means the odds, after costs, are stacked against it.
There is no single right answer – it depends on your goals, timeframe and attitude to risk.
SCM Direct builds its discretionary portfolios primarily from low-cost ETFs – typically around 15 to 20 per portfolio, for broad global diversification at a typical Total Annual Cost of 0.85% all-in cost, with no hidden charges. The aim is to capture the low-cost, transparent benefits of passive building blocks within a professionally managed, risk-graded portfolio that is reactive to market conditions and changes, rather than a buy-and-hold strategy.
Almost – both usually track an index at low cost. The main difference is that an ETF trades live on an exchange and typically discloses holdings daily, while an index fund is priced once a day.
Sometimes – but after fees, most don’t consistently beat their benchmark over the long term, so the higher cost carries a higher risk of underperformance.
ETFs and index funds are usually the cheapest because they don’t pay for stock-picking; active funds cost more.
Yes – ETFs, index funds and active funds can all be held in tax-efficient wrappers.
Tracking a market index rather than trying to beat it – the approach ETFs and index funds use.
