What Is An ETF?

June 16, 2014

Welcome to the first issue of ETF Report UK, which kicks off with a basic guide to the world of ETFs. Here we take a look at the first of four articles looking at Everything You Need To Know about ETFs. The first issue of ETF Report UK can be read here.

 

What is an ETF?

Think you know how an ETF works? Here we run through building an ETF, the different types and what to be aware of when investing. 

Exchange traded funds are revolutionising investing. Their ability to access almost any market, low costs and intraday tradability lend themselves easily to both institutional and retail investors.

It is for these reasons and their ability to be used by all investors that have seen the sector grow to a global market with assets over £1.33 trillion ($2.2 trillion).

However, understanding exactly how an ETF is built … and what advantages and disadvantages it has compared to competing products … is not always clear. This article tries to provide that clarity.

  1. Lower Costs
    ETFs generally have lower costs than other investment products for two reasons: a.) Most ETFs are not actively managed, and tracking an index is cheaper and easier than staffing a team of overpaid city bankers; b.) The ETF structure (outlined below) is more efficient than the traditional fund structure.

 

  1. Buying & Selling Flexibility
    ETFs can be bought and sold at current market prices at any time during the trading day. This is unlike mutual funds and unit trusts, which can only be traded at the end of the trading day.

 

  1. Market Exposure & Access
    Because ETFs can be built with the use of a swap, they are often the only products that are able to access more obscure or less liquid markets.

 

  1. Transparency
    Because ETFs can be built with the use of a swap, they are often the only products that are able to access more obscure or less liquid markets.

 

  1. Taxation
    In the UK, ETFs can be safeguarded against capital gains tax by placing them in an Individual Savings Account (ISA) or a self-invested personal pension. Because UK-domiciled ETFs would be liable for corporation tax on non-UK dividends, most ETFs (which hold non-UK companies and are sold to UK investors) are issued in Ireland or Luxembourg.

An exchange-traded what?
An ETF is an investment fund used (in most cases) to passively track an index. Unlike traditional index trackers, ETFs – as the name suggests – are traded on stock exchanges like shares. 

But there are several stages an ETF has to go through before it can come into being. 

 

Find your next ETF

Reset All