ETFs vs Investment Trusts in a Stocks and Shares ISA (2026/27)

Both exchange-traded funds (ETFs) and investment trusts can live happily inside a stocks and shares ISA, and both let dividends and gains grow tax free. But they are built differently, and those differences matter for cost, income reliability and risk.

The structural difference

An ETF is an open-ended fund that trades on an exchange. The number of units expands and contracts with demand, so the price tracks the value of the underlying holdings closely. Most ETFs are passive, tracking an index like the FTSE All-World.

An investment trust is a closed-ended company listed on the stock market. It has a fixed number of shares, so the share price is set by supply and demand and can drift away from the net asset value (NAV). Most trusts are actively managed.

Head to head for 2026/27 investors

• Cost: broad index ETFs are usually the cheapest, with ongoing charges often below 0.25%. Investment trusts tend to charge more for active management, though a few low-cost global trusts compete closely.
• Pricing: ETFs trade at or very near NAV. Trusts can trade at a discount (price below NAV, a potential bargain) or premium (price above NAV, a warning sign).
• Income smoothing: trusts can hold back up to 15% of income in good years to top up payouts in bad years, which is why some have raised dividends for decades. ETFs simply pass through whatever income they receive, so payouts are lumpier.
• Gearing: trusts can borrow to invest (gearing), which boosts returns in rising markets and amplifies losses in falling ones. ETFs generally cannot.
• Liquidity: large ETFs are extremely liquid. Smaller trusts can have wider buy-sell spreads.

Worked example: the tax wrapper does the heavy lifting

Suppose you invest GBP 20,000 of your ISA allowance: GBP 10,000 in a global index ETF yielding 1.8% and GBP 10,000 in an equity income investment trust yielding 4%.

• ETF dividends: GBP 10,000 x 1.8% = GBP 180.
• Trust dividends: GBP 10,000 x 4% = GBP 400.
• Total dividend income: GBP 580.

In a taxable account, GBP 80 of that (above the GBP 500 dividend allowance) would be taxed, costing a higher-rate investor about GBP 28.60 at 35.75%. Inside the ISA the whole GBP 580 is tax free, and so is any future capital growth when you sell. The structure you choose changes the investment characteristics; the ISA wrapper removes the tax either way.

Which suits you?

• Choose ETFs if you want the lowest cost, broad diversification and simple passive exposure, and you do not mind variable income.
• Choose investment trusts if you value a smoothed, rising income, are comfortable with active management and gearing, and you understand discount and premium risk.
• Many long-term ISA investors hold both: a low-cost global ETF as the core, plus one or two income trusts for reliable dividends.

Whatever you pick, the long-term win comes from filling the GBP 20,000 ISA allowance consistently, reinvesting dividends and keeping costs low. The difference between a 0.15% ETF and a 0.9% trust compounds over decades, so do not overlook the fee.

To project how charges and reinvested dividends affect your ISA over time, use the CalcHub compound interest calculator, and read the investing basics guidance on gov.uk and the regulator's resources before choosing.