ETFs, funds and actions: What are they and what are their advantages? Exchange traded funds, better known by many investors as iShares, the brand owned by Barclays Global Investors ('BGI') have been around the United Kingdom since April 2000 with the launch of iFTSE100 on the London Stock Exchange. After a slow start at the end of 2005 (latest figures available), some 125 billion was held in assets under management. In general, when you search your information during the action, you'll find grouped in the section Extra-Marc, where you'll now find some 45 different ETFs offers. Even if they have been around for some time, we'll just remind ourselves how ETFs work.
They are listed on the stock exchange, providing the flexibility and capacity to trade on the one hand, including the fact that the price is continuously quoted, but a part of the instantaneous exposure can provide an overall index giving you the benefits of a diversification fund. ETFs are also a flexible way of achieving exposure to the profitable market. Because the funds are registered in Ireland, there is no stamp duty payable on purchases. The management fee is levied on dividends that are accrued by the fund and any excess income is then distributed to shareholders: unlike mutual funds, there is no initial fee payable on the original purchase.
The prize fund is always close to the "Net Asset Value (NAV) of the underlying investments and tend to narrow margins, unlike some mutual funds and investment funds. Also ETFs disclose their holdings every day, whereas traditional funds usually disclose their holdings twice a year.
What can I invest?
ETFs offer a wide range of investment opportunities with different risk levels: in mid-December there were 45 different markets / indices to invest in, ranging from corporate bonds to the Taiwanese market.
From the lower end of the risk scale, there are several corporate bond ETFs, and certain investments gold basis. On the road at average risk, you can choose from global funds to those that are more specific to certain regions, like the U.S. or Asia.
There is also the option of investing in individual indices: 'index trackers are available for UK FTSE100 and 250 Indexes, the S & P 500 U.S., Europe or the first 100 euros and 80, covering leading European companies.
For those who want a higher level of risk, there are also ETFs which will give you exposure to emerging markets like Turkey, Korea, Taiwan and Eastern Europe. ETFs do not offer the same wide variety as mutual funds, but to invest in countries and sectors they cover, their charging structure and capacity of trade are in this respect. As such, they provide a good, low-cost, readily tradeable on the road market with the flexibility to move up the risk that your experience and capital increases.
Finally, if you have an appetite for an even spicier, the London Stock Exchange also allows you to invest in commodities through ETCs (Exchange Traded Commodities). Although ETFs, as they are traded in the same manner as shares, and are allowed to be held in a PEP or ISA, they work completely differently.
Whereas ETFs actually buy the underlying investments, ETC managers do not buy and store tons of wheat and copper, stack-up barrels of oil, or herd of cattle in pens. Instead, they buy options on these products. As a result, ETCs are classed as more "complex" of investments by the FSA and you must complete a review of risk "special" confirming that you understand the additional risks of investing in them. So take a fresh look at ETFs - you might find they offer you more than you thought!
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Posted on February 3, 2010.
