Investment Trusts vs ETFs: Key Differences and How to Choose

Investment trusts and ETFs are both pooled investment vehicles, but they have structural differences that affect pricing, fees, and returns.

The Core Difference

Factor	Investment Trust	ETF
Structure	Closed-end fund	Open-end fund
Price vs NAV	Can trade at premium/discount	Tracks NAV closely
Number of shares	Fixed	Created/ redeemed as needed
Management	Active	Passive (most)
Gearing	Can borrow to invest	No borrowing
Dividends	Can retain up to 15% of income	Must distribute all income

What This Means

Feature	Investment Trust	ETF
Trading at discount	Can buy assets for less than they’re worth	Not possible
Premium risk	Can overpay for assets	Minimal
Liquidity	Depends on demand	Usually higher
Stability	Fixed pool of capital	Fund can grow/shrink

Investment Trust Advantages

Advantage	Why
Discount buying	Buy assets at a discount to NAV
Gearing	Borrowing amplifies returns in bull markets
Long-term focus	Managers not forced to sell in downturns
Dividend smoothing	Can retain and distribute income in lean years
Active management	Potential for outperformance

Investment Trust Disadvantages

Disadvantage	Why
Premium risk	Can overpay for the trust
Discount can widen	NAV may rise but share price falls
Higher fees	Active management costs more
Gearing risk	Borrowing amplifies losses too
Less known	Fewer investors understand them

ETF Advantages

Advantage	Why
Low cost	Passive tracking, OCF as low as 0.05%
Transparent	Holdings published daily
No premium/discount	Tracks NAV closely
Broad diversification	Thousands of stocks in one trade
Tax efficient	Fewer taxable events

ETF Disadvantages

Disadvantage	Why
Forced selling	During crashes, ETF sells assets
No discount opportunity	Always trades near NAV
Less flexibility	Passive, no active decisions
Limited income smoothing	Must distribute all income

Cost Comparison

Vehicle	Typical OCF	Trading Cost
Passive ETF	0.05-0.25%	Broker fee
Active ETF	0.25-0.75%	Broker fee
Investment trust	0.4-1.0%	Broker fee
Investment trust (with performance fee)	0.5-1.5%	Broker fee

When to Choose Each

Situation	Choose
Core portfolio, low cost	ETF
Buying during a market crash	Investment trust (discount widens)
A specific sector view	Either
Long-term income	Investment trust
Tax-efficient accumulation	ETF (accumulating)
Gearing for returns	Investment trust

Popular Examples

Type	Name	Focus	OCF
ETF	VWRP	Global all-cap	0.22%
ETF	VUAG	S&P 500	0.07%
ETF	IITU	S&P 500 info tech	0.15%
Investment Trust	SMT	Global growth	0.40%
Investment Trust	FCIT	Global equity income	0.54%
Investment Trust	MYI	UK equity income	0.60%

The Blended Approach

Allocation	Purpose
60-80% ETFs	Low-cost core
20-40% Investment trusts	Active management, discount opportunities

Bottom Line

ETFs are cheaper, simpler, and better for a core portfolio. Investment trusts offer discount opportunities, gearing, and active management but cost more. Most investors should build a core of low-cost ETFs and add selected investment trusts for specific exposures. Inside an ISA, both are tax-efficient. Neither is inherently better — they suit different needs.