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Before we make any specific recommendation to you, we will describe to you as clearly as we can the major risks that apply to a specific ETF. Below is a description of those risks that generally apply to ETFs as a product class. Counterparty risk – most ETFs do not use leverage and aim to achieve their objectives by purchasing a diversified pool of assets, for example the individual stocks that make up the FTSE 100. However, some will seek to achieve their objectives through the use of derivatives, typically swaps, which carry counterparty risk. If the counterparty (here, the issuer of such a derivative) does not pay the sums due, the investor will see a reduced return regardless of the performance of the underlying assets. Leveraged and Short ETFs – products that offer leverage (where gains or losses can be magnified), or that are designed to perform inversely to their underlying index or benchmark, are highly complex financial instruments that carry significant risks. If we make such a recommendation we will describe these risks to you but please ensure that you tell us if you do not understand them before making an investment decision. Taxation – you should be aware that the majority of ETFs are Offshore Funds and as such specific taxation rules apply for investors subject or potentially subject to UK tax. ETFs are traded like shares and may not be for everyone. Predominantly, they seek to closely track the performance of an index and as such their value can go down as well as up and you may get back less than you invested. We will only make a personal recommendation to you to buy such an instrument if we believe it is suitable for you, but if you make such a decision yourself and are in any doubt as to their suitability, please seek independent financial advice.
from private banks to pension funds.svssecurities. Since the first ETF was listed by iShares on the London Stock Exchange in April 2000. LONDON STOCK EXCHANGE DAILY ETF TRADES AND TURNOVER 6000 5000 4000 3000 2000 1000 0 Q1 2004 Q1 2005 Q1 2004 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Daily average no. the number of ETFs have grown year-on-year. They combine the readymade diversification of unit trusts with the simplicity of shares. your investment is losing money. the investor will incur one lot of transaction costs. your investment is going up. To buy one share in 100 different companies the cost would be far greater and require much more investment capital. tracking equity and fixed income indices in the UK and around the world. professional investment managers and private investors. Most ETFs are passive instruments which means they aim to replicate the performance of the underlying index rather than out-perform it. they have been used by the most demanding investors. Since launch there has been a huge number of ETFs available. the appetite for ETFs has not been damaged.EXPLAINED WHAT ARE ETFS? Investing with Exchange Traded Funds (ETFs) is a flexible and cost effective way of creating opportunity in the stock market. ETFs are not risk free. ETFs are revolutionising the way investors manage their portfolios with their simplicity and opportunity to reduce risk. Like other investment vehicles. and bringing a wide range of investments within reach that might otherwise be difficult to access efficiently. The broad range of ETFs offers investors diversification across different markets and asset classes around the world. If the index you choose is going up. to buy one unit of an ETF which invests in 100 different companies.www. if down though. trades daily average Turnover daily average (£m) 450 400 350 250 200 150 100 50 0 Source: London Stock Exchange 2 . The indices they track can be country or region specific (such as the iShares ETF tracking Latin American indices) or based on emerging markets (such as the BRIC 50 ETF) all the way through to developed markets tracking the FTSE 100 and more. Trading statistics show that. of trades FY2009: 2. By closely tracking an index you are not relying on a fund manager to be constantly trying to second guess the market and potentially missing out on rallies. managing risk.34m FY2010: £305. An ETF is essentially a pooled investment fund which is bought and sold on a stock exchange exactly like shares.238 . ETFs are an effective tool to reduce risk at low transaction costs requiring a comparatively small amount of investment capital. allowing investors to spread their exposure globally and cost-effectively through their normal share dealing broker or platform.up 30% year-on-year No. Consult your broker if necessary. For example. During the first 10 years of trading on the London Stock Exchange. Investors are advised to assess fund objectives and understand the tracking mechanism before investing. despite the economic downturn.918 FY2010: 4. These instruments give investors instant diversification with one unit representing an investment in multiple companies and sectors.com INVESTING IN ETFS .up 45% year-on-year Daily average turnover FY2009: £235. They are eligible for ISAs but attract no stamp duty and have some of the lowest annual charges of all collective investment schemes.40m . The flexibility also enables them to be used as part of a Self-Invested Personal Pension (SIPP) or a self-select ISA.
These can go long or short on the index they are tracking. This is carried out with a counterparty who is tracking the returns of the index and the two will swap the returns on the assets they hold. LIQUIDITY (4) Investors can buy and sell ETFs through their broker. There are also leveraged ETFs. Because swap-based ETFs rely on the swap counterparty to deliver the returns of the underlying index.www.svssecurities.com WHAT ARE THE DIFFERENT TYPES? There are two main types of ETFs. A swap-based ETF does not hold physical shares in the companies but instead replicates the performance of the index via a swap arrangement. your investment will be split between the 100 companies in the FTSE 100. a leveraged ETF might attempt to achieve returns which are 2 or 3 times more than the FTSE 250 daily movement. The collateral is ring-fenced so that investor assets are segregated to provide protection if ETF providers fail. if you are tracking the FTSE 100 by purchasing 100 shares in that ETF. Cash-based ETF investors are also protected under UCITS collateralisation requirements. and can lose more than their original deposit as with most leveraged products. this represents a degree of counterparty risk. For example. cash-based and swap-based A cash-based ETF physically holds the shares of companies in the underlying index. For example. These attempt to achieve returns that are more sensitive to market movements. These can be highly volatile and incur higher costs as investors trade on margins. An ETF which shorts this would be attempting to achieve returns which are -2 or -3 times the daily return. BROKER CAPITAL MARKETS LONDON STOCK EXCHANGE (1) The Authorized Participant / ETF Market Maker buy securities from the market. gaining on the loss of the index. AUTHORISED PARTICIPANTS ETF MARKET MAKER (3) The custodian bank holds the basket of securities and gives the Authorised Participant / ETF Market Maker ETFs which can then be traded on Exchange (2) Authorised Participant / ETF Market Maker assembles a basket of securities which will replicate the performance of the underlying index and transfers them to a designated custodian bank. ETF CUSTODIAN 3 .
NO STAMP DUTY ETFs are not subject to stamp duty. ETFs can be as liquid as the underlying securities they represent. Many investors have found they free up time to focus on an area of core expertise by providing broad exposure. ETFs which have a more narrow focus could still carry this risk. COST EFFICIENCY ETFs have low management fees. Market makers quote two-way prices with tight spread requirements set by the Exchange. With each ETF producing a factsheet stating exactly what investors are being exposed to alongside sector or country weighting. Information also given on exactly how the tracking process works.www. TRANSPARENCY Components of the underlying companies are fully visible to the investor. LOWER RISK A portfolio which is effectively diversified carries less risk than a narrow portfolio.com WHAT ARE THE BENEFITS? There are a huge amount of benefits that investors have found trading ETFs. PORTFOLIO A: CONCENTRATED PORTFOLIO B: DIVERSIFIED Number of shares held Expected return (per annum) Expected risk (per annum) 4 7% 14% 45 6% 9 4 . FLEXIBILITY ETFs can be used in a number of ways from simple index tracking to part of a complex trading strategy. Of course. reducing costs.svssecurities. Prices are quoted and can then be bought and sold and settlements held alongside normal shares. Investors can gain exposure to domestic and international sectors and markets which may otherwise be difficult to access in a cost effective way. ETFs are a simple way of spreading the risk wide across a number of companies without having to purchase each individual share. SIMPLICITY ETFs are traded during the regular trading hours just like shares and can be bought and sold through a normal share dealing account. DIVERSIFICATION There are very little limits on what ETFs can do. LIQUIDITY Traded like shares. and are obviously much cheaper than buying each individual underlying asset. This enables greater exposure for less.
www. investors can buy ETFs which are set up to track the inverse of an index. ETFs can give you an instant price. where you may not be able to deal for 24 hours and will not find out the price until afterwards. enabling private investors to act almost as hedge funds. quickly and cheaply. Passive tracker funds are therefore part of a successful active strategy. then an instant deal. Any desire to rebalance an investor’s portfolio can happen with just a couple of trades. ETFs also allow even the smallest portfolios to achieve broad diversification. CORE APPROACH ETFs allow investors to build a core market portfolio while concentrating on those instruments they follow closely and add their stock picks for additional out performance. You can use specific ETFs as a hedge against inflation or as a hedge to say. or reduce risk by being able to change exposure levels at any time. Swapping instantly between a portfolio focused on Japan and a portfolio weighted towards Eastern Europe. SHORTING Because ETFs trade just like a share. Unlike unit trusts. with or without leverage. for example. bonds. small-cap value. 5 . the US or Europe easily. commodities. Investors can use ETFs to invest with or against broad categories such as large growth. Or alternatively. it’s possible to short a whole index simply by purchasing an ETF which is structured to short it. SHORT TERM TACTICAL INVESTING Markets can move very fast. any investors can use ETFs successfully. could be achieved in just two trades. HEDGING ETFs give you almost unlimited flexibility.com WHAT ARE THE USES AND STRATEGIES? ETFs can help in a range of investment strategies: QUICKLY STEERING STRATEGY The flexibility in ETFs means an investor can achieve broad exposure to equity. By fine-tuning different strategies.svssecurities. Take advantage of short-term market fluctuations. biotech or energy sectors. thereby shorting the constituent companies. a falling British Pound against the US Dollar. long or short.
and those unsure should seek professional advice. Research is still needed into sectors and companies. They are subject to Income and Capital Gains Tax in the same way as equities and there is a small management charge levied by the issuer. Not all ETFs will be suitable for individual investors. investors should take care that profits are not eaten up by dealing costs. despite their cost-effectiveness. As ETFs are listed on the London Stock Exchange firms that deal in them. ETFs track their index well. there may be instances where some ETFs have trouble tracking their benchmark. Research carefully to make sure the index you are tracking really does reflect what it says it does.svssecurities. which is already one of the most cost effective in the market. Despite seeming to be a good way to diversify across Asian nations. and SVS Securities offer this as part of their online platform. As they are bought and sold like a normal share.COM Phone: 020 7638 5600 • Fax: 020 7638 5601 • www. Transactions are subject to the same fees as share transactions (except stamp duty). so may not be as diversified as some investors would like. but there are different methods. This means that. SVS Securities use an analyst to produce research to help investors and provide trading ideas for your dedicated broker based on your individual investment objectives. APPLY FOR AN SVS ACCOUNT AND TRADE ETFS NOW IF YOU ARE ALREADY AN SVS CLIENT SPEAK TO YOUR BROKER ABOUT ETFS INFO@SVSSECURITIES. For the most part. Take the iShares MSCI Pacific Ex-Japan fund. THERE IS A WORLD OF OPPORTUNITIES AVAILABLE IN ETFS.svssecurities. according to Index Universe.www. and investments can suffer. HOW TO TRADE THEM Investors can access the market via a broker and the individual ETF provider will provide fact sheets on each of their funds. especially if they are heavily weighted in the index. There can also be tracking error. investors should pay close attention to the difference between the buy and sell price.com 6 . Execution only brokers will buy or sell according to investor instructions providing no investment or trading advice. are authorised and regulated by the Financial Services Authority (FSA). Buying in and then out of an ETF with a wide spread can make losses add up. There can also be a risk with spreads. using different computer algorithms. the fund is 67% exposed to Australia and New Zealand. such as SVS Securities. to give investors peace of mind.com WHAT ARE THE RISKS? Like any investment there are inherent risks involved. Advisory brokers provide advice and execute trading decisions made by the investor. In rare circumstances and particularly volatile markets.
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