What is an ETF?

An exchange traded fund (ETF) is a basket of securities that trade just like a single stock, on an Exchange. The advantage of them is that investors can gain exposure to a pool of investments without having to buy all the individual constituents.

ETF’s combine the diversification of investment funds with the tradability of a regular stock.

They are known as “open-ended” investments rather than “closed-end” which results in new stock units being created when new money is invested in the fund. When money is withdrawn, units are redeemed.

A guide to ETFS

The exponential growth of ETF’s

ETF’s were introduced in 1993 and have grown in popularity each year since. It is estimated that globally there are $6 trillion in existence.

Types of ETF’s

The most common types of ETF’s are ones that track Equity market indexes like the FTSE100, Nasdaq and Dow Jones. Equity ETF’s can also track specific sectors and investment styles like growth and value. There are also many types of ETF’s that track other asset classes like Bonds, Commodities and Currencies.

The key advantages of ETF’s

Trading flexibility – Simple to trade on an exchange so available to buy or sell when the exchange is open.

Liquidity – As ETF’s can be created or redeemed with the ETF Provider, they trade at Fair Value – this is called the Net Asset Value of the ETF.

Transparency – Information on constituents, costs and performance is published daily.

Cost efficiency – ETF operation costs can be streamlined compared to regular funds so their annual fees are more attractive. The typical fee or “total expense ratio” is around 0.5% versus traditional fund fees in excess of 1%.

Risk

Just like all financial investments, ETF values can go up or down. An ETF tracking a more risky underlying like Emerging Market shares will have more risk and volatility attached to it than an ETF that tracks UK Government Gilts.

ETF Providers

Blackrock continued its dominance globally and along with Vanguard and State Street Group accounted for over 50% of ETF assets under management. Index trackers following the S+P and Nasdaq are the most popular.

In Europe Blackrock also dominates with a 44% market share. Deutsche Bank X trackers has a 11% share followed by Lyxor owned by Societe Generale.

Summary

ETF’s are a tradable tool that makes trading and owning a variety of different constituents effortless. One of the most important advantages they have over regular funds is that passively managed funds absolutely outperform actively managed funds over time with lower costs as well.

Consider this staggering statistic. 92% of large cap, 95% of mid cap and 93% of small cap fund managers underperformed their benchmark index over the last 15 years.

In today’s complex world of so many different funds it becomes almost impossible for investors to ascertain whether their performance and the fees they are paying are above or below the average. Everyone hates over-paying and investments should be no different.

With ARQ (www.yourarq.com) you are now able to score your investments’ performance relative to costs. Additionally you can see choices of better performing funds, including Exchange Traded Funds. This is the first of its kind in helping investors know where they stand and see where they could be.

Gary Skovron
Gary Skovron

Investment Banker for 25 years - left Credit Suisse as Managing Director in 2012. Experience in trading options, futures, derivatives, Delta 1 products and Exchange Traded Funds.