INVESTING EXPLAINED: What you need to know about Exchange Traded Funds, the vast majority of which are passive and track a stock market index
In this series, we bust the jargon and explain a popular investing term or theme. Here it’s Exchange Traded Funds.
What does it stand for?
The letters stand for Exchange Traded Fund which, as the name suggests, is a fund that can be bought or sold on a stock exchange throughout the day.
The first of these funds – the S&P 500 Trust ETF, also known as ‘the Spider’ – was launched in 1993. Subsequently they have become hugely popular, particularly in America. ETF assets under management now total £7.6trillion.
Standing out: The letters stand for Exchange Traded Fund which, as the name suggests, is a fund that can be bought or sold on a stock exchange throughout the day
Why have they been successful?
The simplicity of the offer and the range of investments available have fuelled the ETF’s ascent. The vast majority of ETFs are passive funds that track a stock market index, such as the S&P 500 or the FTSE 100. ETFs also invest in commodities, like gold. Legal & General Investment Management (LGIM) offers an All-Commodities ETF, for example. ETFs tend to be lower cost, attractive to investors weary of the large fees levied by some traditional funds.
What’s a thematic ETF?
This type of fund backs an investment theme, such as robotics, hoping to spot the current or future stars in the sector. For example, the RIZE fund management group offers ETFs investing in cyber-security, digital payments, environmental impact and the sustainable future of food. LGIM’s thematic range includes funds with holdings in artificial intelligence and clean water.
What are synthetic ETFs?
Most ETFs are ‘physical’. The fund manager buys the shares in the index that the fund is supposed to track. A synthetic ETF – seen by some as more risky – aspires to match the return of the index without buying the shares. Instead the fund’s manager strikes an agreement with a counter-party, usually an investment bank, which pledges to replicate the return from the index by buying derivatives.
Why choose one?
The attraction of an ETF over the usual type of open-ended fund is that the ETF can be bought and sold throughout the day. An open-ended fund can issue new shares, unlike an investment trust which is a closed end fund – with a fixed number of shares. An investment trust can be bought or sold throughout the day. But its shares can move to a discount, or a premium to the value of the trust’s net assets. The value of an ETF should be close to that of its net assets.
Who are the big names?
Blackrock – the world’s largest asset manager – State Street Global and Vanguard are the three top players.
In 2021, Blackrock, owner of iShares, attracted $1billion every day. Such is the competition in the sector that there is a continuous price war between the rival groups, driving down the costs for investors.
Blackrock leads the field in the ESG (environmental, social and governance) ETFs preferred by younger investors.
Which is the most controversial?
The most talked-about manager is Cathie Wood, the Wall Street star with a cult following among private investors. Her Ark Innovation ETF, which backs the big tech groups like Tesla and Zoom, has tumbled in value. Last year, Michael Burry, the trader made famous in the film The Big Short, shorted the fund. Despite the losses, cash continues to flow in.
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Read more at DailyMail.co.uk