One of the great mysteries in the UK personal finance sector in recent years has been the distinct lack of penetration of ETF sales.
This is despite assets under administration and sales in the US racing ahead with the market growing exponentially and assets now standing at nearly $3trn (£2.11trn).
Instead, the UK experience is advisers remain rooted to the traditional unit trust and OEIC alternatives, despite the poor track records of actively managed funds, which continually fail to beat their benchmarks.
Undoubtedly there is a lack of knowledge about ETFs in the UK or a lack of any real understanding of what precisely ETFs are, and what advantages they offer, which we will consider now.
What is an ETF?
ETF stands for exchange-traded fund. These are open-ended investment funds with shares that can be traded on an exchange. Just like tracker funds (Oeics), they are funds and they track a certain index. This index can be a broad market index like FTSE-All Share or a sector index such as Global Infrastructure.
The main difference between ETFs and tracker funds is that ETFs, like the name suggests, trade on exchanges just like ordinary stocks and shares.
As they are traded on exchanges, their price varies throughout the day as the performance of their underlying shares changes.
Why were ETFs created in the first place?
ETFs were created to bring accessibility and liquidity to investors by offering them the ability to effectively trade market indices on an exchange. Effectively, ETFs combine the performance of the traditional tracker funds with the flexibility of ordinary shares.
The ETF market place and its evolution
The ease of accessibility has led the global ETF market to grow rapidly in the last decade. As of December 2015, the size of the industry was reported to be nearly $3trn (£2.11trn) with over 6,000 listings across global exchanges, issued by over 250 providers.
The ETF industry started off with issuance of plain vanilla ETFs that competed directly against existing tracker funds.
Being easily tradable all throughout the day, the ETFs gave investors a sense of transparency as they would know exactly how much they paid to buy an ETF, whereas the same was not certain with tracker funds, as most of them are priced only once daily and investors wouldn’t really know the price until the end of the day.
Ease of availability and transparency led to a rapid growth of ETFs worldwide compared to tracker funds.
Source: http://www.etfgi.com/news/detail/newsid/870
ETFs are typically open-ended, index-based funds. They can be bought and sold like ordinary shares on a stock exchange and offer broad exposure across developed, emerging and frontier markets, equities, fixed income and commodities.
Exchange-traded products (ETPs) are products with similarities to ETFs in the way they trade and settle, but do not use an open-end fund structure.
