Most investors naturally start with ETFs.
They are cheap, simple and give you broad diversification in a single investment. For many people, a global ETF can still do most of the heavy lifting inside a long-term portfolio.
But investment trusts can offer something different.
In this episode of Behind the Portfolio, I look at how investment trusts compare with ETFs, why they may deserve a place in a portfolio and four trusts currently on my radar.
ETFs vs Investment Trusts
An ETF normally follows an index. It gives you exposure to a group of companies without relying heavily on a fund manager to make active decisions.
An investment trust is a listed company that owns a portfolio of investments. Most are actively managed, meaning the manager decides which companies or assets to buy.
Investment trusts can also:
- Borrow money to invest, known as gearing
- Hold back income to support future dividends
- Invest in specialist or less liquid assets
- Trade above or below the value of their underlying holdings
That final point is important.
Investment trusts can trade at a discount or premium to their net asset value. A discount can create an opportunity, but it does not automatically mean a trust is cheap or that the discount will close.
Why Consider Them?
I still see ETFs as an excellent core holding.
Investment trusts are more interesting to me as additional positions around that core. They can provide exposure to a specific sector, region, investment style or income strategy.
The key is making sure each trust has a clear purpose.
BlackRock World Mining Trust | BRWM
BRWM invests in mining and commodity-related companies around the world.
It provides exposure to areas such as copper, iron ore, gold and other materials needed for construction, infrastructure and electrification.
The potential upside is strong when commodity markets perform well, but mining is extremely cyclical. This is specialist exposure rather than something I would use as the foundation of a portfolio.
