Module 7: ETF basics

Learning objectives

This module will educate the reader about the key differences between physical and synthetic ETF structures, detailing the characteristics and advantages of physical ETFs including their transparency, straightforwardness and direct holding of underlying constituents. It will advise the reader on the various approaches used in physical replication, such as full replication, sampling and optimisation, and when each approach is typically employed. In addition, the reader will be given an insight into the risks and benefits associated with physical ETFs, including exposure to counterparty risk and the importance of due diligence in evaluating these funds.

The module will also provide information to the reader about the bid-ask spread cost and operating costs of ETFs. Moreover, it will introduce the reader to the diverse applications of ETFs in short and long-term investment strategies. The reader will be educated on core allocation, portfolio completion, active and passive combinations, liquidity management, transition management, rebalancing, tactical adjustments and overlay management.

Learning outcomes

Upon completion of the module, the reader should feel confident to make informed ETF selection decisions based on their client’s specific needs and investment objectives. They should be able to identify scenarios where physical ETFs are preferable, such as when seeking broad exposure to market cap-weighted benchmarks or dealing with illiquid securities. The reader should recognise the significance of transparency and how to assess an ETF’s replication technique, including securities lending practices. Moreover, they will comprehend the concept of counterparty risk and how it relates to synthetic ETFs along with the advantages and disadvantages of using swaps for index tracking. The reader should have the knowledge and tools to assess the trade-offs between physical and synthetic ETFs and understand how each structure can offer efficient access to different market segments.

In addition, upon completion of this module, the reader should feel proficient in utilising ETFs effectively in different investment strategies based on specific objectives and market conditions. They will recognise the benefits of ETFs in providing fast, precise and cost-effective access to various assets, facilitating diversification and risk management. Finally, the reader should understand how to tailor their investment approaches to meet clients’ needs using ETFs.

  • Unit 1: What you need to know about physical and synthetic ETFs

    Reading time: 10 minutes

    This article gives an overview of physical and synthetic ETFs and aims to equip advisers with the information to make the most informed ETF selections.

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  • Video 1: How can ETFs be used?

    Watching time: 2 minutes

    We explore the different ways that investors can use ETFs in their portfolios.

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  • Video 2: What are the costs of ETFs?

    Watching time: 2 minutes

    Learn about the different costs associated with ETF investing.

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  • Video 3: How do ETFs compare with mutual funds?

    Watching time: 2 minutes

    Find out the key similarities and differences between ETFs and mutual funds.

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  • Module 7 quiz

    Take the Module 7 quiz for 30 minutes of CPD

    quizTake the quiz

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