What are Exchange Traded Funds?
Exchange Traded Funds, or ETFs, are pooled funds that are traded on the stock exchanges around the world in exactly the same way as stocks and shares. They are neither Unit Trusts nor Investment Trusts, but are a new type of investment which was first traded in the US in 1993 and launched in the UK in late 2000.
Each fund is set up to track the performance of an index or market sector by buying all the underlying stocks in proportion to their weighting. Effectively, each ETF is combining the performance of the traditional tracker funds with the flexibility of ordinary shares.
ETFs are traded like ordinary shares and are listed on recognised stock exchanges, for example, the London Stock Exchange and the New York Stock Exchange. ETFs are not covered under the Financial Services Compensation Scheme so there is a higher risk than purchasing a Tracker Fund via an OEIC.
There is also the risk that the ETF does not always physically hold the underlying assets and therefore there is a counterparty risk. Should the counterparty default there would be a loss not reflected in the performance of the underlying index.
There is a certain amount of “hype” concerning these funds particularly because of low costs, but as with all investments clients need to understand the nature of the investment and the attaching risks.
Nicholls Stevens regularly advise clients on the selection of Exchange Traded Funds which can be easily purchased via Platforms such as transact or Alliance Trust