Our video tutorial introduces you to the basics of ETFs
What are ETFs? Well, firstly ETF stands for Exchange Traded Fund. ETFs are a type of collective investment fund, trading on stock exchanges around the world, including the London Stock Exchange.
Like other index funds they allow investors to invest in an index portfolio, tracking specific market indices. As the value of the indexed securities fluctuates, so too does the value of the ETF tracking it.
An ETF therefore combines the attributes of an index fund and an individual stock. It might not be immediately obvious why that could be a good thing, but let us explain…
Instead of investing in shares of a single company, an ETF follows a specific index made up of multiple securities. This approach means you can diversify your portfolio…with less capital than you’d need to use to invest in each company alone, leading to lower operating costs.
ETFs are bought and sold through stockbrokers and stockbroker platforms, rather than directly with Fund Management company. In the EU they are often regulated under the EU’s UCITS regime.
Like individual stocks, ETFs are continuously priced – their price varies throughout the day - meaning they can be bought and sold at any time during standard stockmarket trading hours.
Note, in comparison, OEICs and Unit Trusts can only be purchased at a specific time of day, once a day
ETFs are open-ended by nature. The Fund Manager can create or redeem shares accordingly to meet the demand of the investors. Imagine a full hotel generating rooms to accommodate extra visitors.
Following the FSA’s Retail Distribution Review, advisors face a new “whole of market” challenge. ETF’s were specifically highlighted as being a cheap and transparent way to invest a particular market, and as such are worthy of consideration by advisors for their retail clients.
In the US and Canada, ETFs grew strongly through institutional channels, eventually penetrating the Adviser channel, before being taken up by direct Retail investors.
With this in mind, we believe that ETFs will soon play a central role within the advisor’s toolbox in the UK.