EXCHANGE TRADED FUNDS (ETFs)
Exchange Traded Funds (ETFs) are really just another type of investment fund, normally based on a well-known index (such as the FST 100 Index), but they can be traded on a stock exchange.
ETFs can be bought or sold through stockbrokers or stockbroker platforms. Their prices vary throughout the day which means that they can be purchased at a known price any time when markets are open.
They have similarities to funds and shares - shares because prices vary during the day and can be purchased at any time when markets are open, and funds because they are not based on a single share, normally on an Index, whether a UK or overseas stock market index or a commodity index.
A distinction needs to be made between Physical ETFs and Synthetic ETFs:-
Physical ETFs generate returns from holding all, or a representative sample, of the actual physical securities of the Index, like a tracker fund. The underlying assets are ring-fenced and kept safe by a third party custodian.
Synthetic ETFs usually employ a financial derivative instrument called a "total return swap". This involves entering into a contract with a counterparty in the market who promises to pay the total return. There is an added risk here - the risk that the counterparty defaults.
The attraction of ETFs lies with cost. There is usally a small dealing fee (0.1% example), maybe a stockbroker commission, and service fees usually very low (eg 0.25% pa). This makes them attractive compared to most funds, although some tracker funds have now reduced their annual fund charges considerably.
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