Newest Review: ... managed, either tracking an index or using some sort of screening algorithm to determine the undelying investments. They have the advan... more
Don't Pay The Bankers
Member Name: AndrewPo
Date: 26/03/09, updated on 28/03/09 (339 review reads)
Advantages: Low fees, price quoted throughout the day, no fund manager
Disadvantages: no fund manager
Exchange Traded Funds or ETCs are an alternative to other kinds of collective investment funds, such as Mutual Funds (in the US), Unit Trusts or Investment Trusts. ETFs are a relatively new invention, especially in the UK, but in the USA there are many hundreds to choose between and the number of available funds is continuously increasing. ETFs are passively managed, either tracking an index or using some sort of screening algorithm to determine the undelying investments. They have the advantage that, as a consequence, they have far lower fees and total expense ratio (TER) than managed funds. i.e. no over-priced fund-manger to pay.
Pros and Cons of ETFs
Exchange Traded Funds and ETCs are very similar to Unit Trusts except the price is quoted continuously through the trading day, like a share or an Investment Trusts rather than just once and there is no real manager, because they simply track an index (or other more complex screening algorithm) using computers, therefore have very low annual fee and small bid/offer spread. This makes them very good for short term trading.
The main disadvantage is you will have exposure to the whole index including badly performing companies or assets, whereas with a managed fund, if the manager is good, you may be able to avoid exposure to the badly performing assets (fund-managers however do not have a good reputation for justifying their fees)
How to Buy ETFs
ETFs are available from any stock broker in the same way you might buy a share, stock or managed fund and can be held in an ISA (although there may be a trading fee unlike when buying a unit trust). They are also listed in many good financial publications such as the Financial Times.
There are now many other companies providing ETFs and ETCs including: iShares Plc (currently owned by Barclays although they are trying to sell it) and Lyxor ETF. They all tend to have low charges, when compared to managed funds, but even so, it may be worth shopping around for alternative similar products, when investing.
What Can You Invest In?
ETFS can be used to gain exposure to: Stock indices such as the S&P, Dow, FTSE etc.; Bond indices in many countries; Commodity Prices e.g. Gold, Silver, coffee; currencies; Agricultural commodities such as lean hogs (ticker symbol: HOGS) The ETFS web-site give a overview of the funds available from them. The majority are quoted in dollars, although a few are quoted in Sterling as well.
ETFs and ETCs are a very good inexpensive way of gaining exposure to investment markets, avoiding the high cost of a team of investment managers and analysts. They are probably slightly riskier and are aimed at more experienced investors who can manage their investments themselves. ETF Securities is a good provider of global ETFs and ETCs with a very good range, albeit with a heavy US investor bias. UK or European investors should also consider other providers such as iShares.
This article is based on my article published on Squidoo: http://www.squidoo.com/investinginexchangetradedfu ndsetf
Summary: Keeps down your investment costs
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