A GUIDE TO EXCHANGE TRADED FUNDS

Transcription

1 A GUIDE TO EXCHANGE TRADED FUNDS

2 Contents Introduction Page 3 Introduction Page 4 Cost Effectiveness & Diversification Page 5 Liquidity & Dividends Page 6 Additional Considerations Page 7 Risk Warning Exchange Traded Funds (ETFs) track the performance of an underlying index or basket of stocks like an index tracker fund but trade on an exchange like a stock. When you purchase an ETF you gain the diversification of a basket or index of stocks similar to a traditional mutual fund but with lower costs and the liquidity benefits of an individual share. There is a vast range of ETFs, some will track an underlying index, such as the FTSE 100 or S&P 500. Other ETFs will track a basket of stocks such as European Banks or UK Property Companies. The performance of ETFs are directly linked to the index they track, so if you invest in a FTSE 100 ETF and the FTSE 100 falls 5% you should expect the ETF to fall 5%. Managers will buy and sell holdings only to reflect any changes in the underlying index. Benefits of trading Exchange Traded Funds: ETFs are typically used to build a solid low cost core to a portfolio aiming for longer term growth. However, this does not exclude their use for short-term speculation on particular global investment trends. The range of assets classes covered by ETFs makes them a vital tool for the tactical investor, whatever his or her risk tolerances are. A combination of ETFs can be used alongside traditional shares to form a Core / Satellite portfolio with ETFs forming the core and individual stocks acting as satellites. An active investor with a high tolerance to risk may opt to engage in ETFs that specialise in a particularly volatile stock sectors such as the financial or technology sectors or trade an ETF that tracks a commodity like copper. In contrast, an income seeking investor may value regular dividend payments such as those available through an investment in a broad-based equity market ETF like the S&P 500. Cost effectiveness Diversification Good levels of liquidity Access a wide range of asset classes Ability to pursue specific strategies

3 Cost Effectiveness Liquidity The significant savings in charges that can be achieved It is only a difference of 0.5% but this makes a significant by investing in ETFs is undoubtedly one of the biggest difference over a longer period of time. Over a ten-year factors in their growing popularity among retail and period this would add up to 500 on a 10,000 investment. institutional investors alike. Bearing in mind that the previously mentioned special offer was one of the lowest annual charges on mutual Exchange Traded Funds generally have lower expense funds, many investors will be paying charges well in ratios than traditional mutual funds such as Unit Trusts excess of 1.00% per year, even if it is through a fund and Open-Ended Investments Companies (OEICs). supermarket. Taking this into account the difference in charges between a mutual fund and a well-diversified ETF For example, the on-going charge for the HSBC S&P 500 could be more than 1,500 over a ten year period on a UCITS ETF is as low as 0.09%. When you compare this to 10,000 investment. For those who have built a portfolio Hargreaves Lansdown s special offer when Neil Woodford of over 100,000 the loss in charges could be well in launched his new fund with an annual charge of 0.6% it excess of 15,000, not an inconsiderable sum. highlights the relative expensiveness of mutual funds. Diversification The rapid adoption of Exchange Traded Funds can be Not only do ETFs provide diversification in terms of asset attributed to the excellent diversification benefits classes and stock selection but also in the strategies that they provide. They offer exposure to a wide range you can pursue. of asset classes such as commodities, bonds and currencies as well as traditional shares both on home A simple demonstration of this is the example of an markets and on exchanges further afield which might investor who thinks the FTSE 100 is going to fall in value. otherwise be harder to gain exposure to. In this circumstance an investor can select from a range of ETFs that move inversely to the FTSE 100. This means If you want access to a selection of corporate bonds that when the FTSE 100 falls in value the price of the ETF from US blue chip companies for example, you will find a goes up returning the investor a profit. Examples of other range of ETFs that meet the specific requirements. If you strategies include minimal volatility, increased volatility feel the Japanese Yen is going to appreciate there are a or leveraged ETFs. selection of ETFs to choose from. If you decide the price of oil will rise there are ETFs for that. The opportunities Regardless of risk tolerances and time horizons spreading really are truly extensive. your investments out will provide a more stable portfolio and reduce your reliance on any one area. ETFs are bought and sold on exchanges so the price is In some circumstances buy/sell spreads can be smaller dictated by the supply and demand for the shares as than mutual funds tracking similar securities, reducing opposed to being priced to the Net Asset Value at the hidden transactional costs. end of each day like a mutual fund. Of course there are differing levels of liquidity between ETFs are considerably easier to buy and sell than ETFs; an ETF that focuses on a broad US equity index is traditional funds as they are exchange traded meaning likely to be more liquid than one that tracks a specialised there is continuous pricing and trading through the sector of small cap stocks for example trading day. Dividends ETFs that pay dividends out to investors are labelled It will be prudent for an investor to decide what is Distributing ETFs as they distribute the income important to them when selecting an ETF, either capital received from the underlying securities to the ETF appreciation or income. Distributions will vary between holder. The other form of ETF is a Capitalising ETF, ETFs depending on the asset classes and where the ETF this structure rolls up dividends into the performance is domiciled. You could be paid dividends in different of the ETF. currencies so this is worth clarifying. Dividend Distribution 4 5

4 Additional Considerations Risk Warning Tracking Error Other Instruments The value of your investments will fluctuate and you may get back less than your original investments. Please Before trading Contracts for Difference, ensure you fully understand the risks involved. These products may not be A factor to bear in mind when investing in an ETF is the tracking error. The tracking error is the difference between the performance of an ETF and its target or underlying index. Tracking error is usually small and tends not to have a huge impact on returns but it is always worth keeping an eye on. This deviance is due to the nature of buying and selling stocks to replicate the index and the small inevitable inaccuracies that develop over time when dealing with large volumes of shares. Inverse ETFs When looking at leveraged ETFs the leverage and rebalancing is provided on a daily basis, therefore investors would be mistaken to think a twice leveraged ETF will return double the markets return over a longer period of time. Generally highly leveraged ETFs should be utilised when expecting short, sharp movements in markets / sectors - from intraday to weekly - whilst their non-leveraged counterparts are generally held for longer timescale exposures. You are not limited to just buying the physical ETFs. For those who trade CFDs or Options, Charles Hanover Investments can advise on which ETFs are tradable through a range of derivative products providing further possibilities for your investment strategy. Professional Advice When you open a Charles Hanover Investments Advisory Account you will be allocated a personal broker who will work with you when building your portfolio. They will be able to provide key metrics on certain ETFs and give advice on which will be most suitable for your investment objectives. ensure you understand the risk of any investment you chose to undertake and seek independent financial advice where necessary. Trading Contracts for Difference (CFDs), Futures and Spread Betting carries a high level of risk to your capital, and is not suitable for all investors. Only speculate with money you can afford to lose. Trading or placing any bets can result in consumers incurring liabilities in excess of their initial stake. Please ensure you fully understand the risks, and seek independent advice if necessary. Charles Hanover Investments Ltd is a trading name of Equitrade Markets Ltd, a company authorised by the FCA to provide advice on shares, spread betting, CFDs, futures, options and rolling spot foreign exchange. Before we can begin to send you our advisory recommendations you must complete our online application. We will also require you to open a trading account with one of our third party preferred providers and details of this will be sent to you upon completion of suitable for all types of investor. Trading in Contracts for Difference carries a high degree of risk and is generally considered suitable only for the more experienced investor. Leveraged products carry a high degree of risk for your capital, and in some circumstances you may be liable for a greater sum than your initial capital invested. Past performance is not necessarily a guide to future performance. Seek independent financial advice if necessary. These products are suitable only for people over the age of 18. Information and analysis produced by Charles Hanover Investments Ltd does not constitute a recommendation or offer to make a transaction in any derivatives or securities, and is intended to be general in nature. Charles Hanover Investments Ltd is an trading name of Equitrade Markets Ltd which is fully authorised and regulated by the Financial Conduct Authority (FCA No ). the advisory application form. By completing, signing and submitting the Charles Hanover Investments Ltd form you are confirming that you have read and agreed to our Terms of Business and Risk Warning. 6

5 Telephone: +44 (0) Address: Charles Hanover Investments 2 London Wall Buildings London Wall London, EC2M 5UU Charles Hanover Investments Ltd is a trading name of Equitrade Markets Ltd authorised and regulated by the FCA (FCA No )