Many people will have read something about ETFs however given that it is a simple concept, very few people really know what ETFs are. Below are some key points that you should be aware of when investing within an ETF.
What is an ETF - Summary of the concept
An ETF is a pooled investment fund similar to a unit trust or mutual fund, which can be bought and sold on a stock exchange, like ashare in a company.
Essentially an ETF is an index tracking fund. Its aim is to provide investors with the same return as the chosen index - (i.e. the FTSE 100 or the S&P 500). For example, if the FTSE 100 index goes up by 10% during a year, an ETF tracking this index should provide investors with exactly the same return, minus fees.
ETFs track most major indices for stocks, bonds, commodities and other asset types. Sector based ETFs are also available, offering access to specific industries.
The Benefits
ETF’s offer a range of benefits to investors and can enhance a portfolio in the following ways:
Transparency
Investment objective of the fund is simply to track an index
There is daily disclosure of the underlying securities of the fund
ETFs carry an explicit total expense ratio
Liquidity
ETFs are listed on exchanges and can be traded at any time the market is open
An ETF is as liquid as its underlying securities
Diversification
At fund level: holding the entire index in just one trade
At portfolio level: ETFs cover a full spectrum of asset classes.
Flexibility
Intraday trading: as easy to get in as to get out
Cost effectiveness
ETFs offer a cost effective route to diversified market exposure
The average total expense ration (the overall annual cost of the fund) for ETFs in Europe is 0.31% per annum versus 0.87% per annum for the average index tracking fund.*
What type of ETF’s are available?
There are a range of different companies offering ETFs throughout the UK and Europe. They can offer some of the following indices to track:
FTSE 100; FTSE 250; MSCI Europe; S&P 500; MSCI world; MSCI Japan; MSCI Emerging Markets; MSCI Latin America; MSCI Brazil; S&P
Global Timber and Forestry; S&P Global Clean Energy; £ Corporate Bonds; DJ STOXX 600 Basic Resources.
Some of the aforementioned indices will mean more than others but they show the diverse range of assets you can hold within ETFs.
TO SEE HOW ETFs CAN ENHANCE YOU PORTFOLIO PLEASE CONTACT ONE OF OUR ADVISERS ON 0871 271 1280.
*Source: iShares “ETF: A Guide For UK Financial Advisers”. From: Morningstar, ETF Research and Implementation Strategy Team, As at end March 2009.
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