DIY Investor Magazine
/
December 2015
32
EXCHANGE TRADED PRODUCTS
IN THE SPOTLIGHT
In the first of a series of special focus editions we take
a closer look at Exchange Traded Products (ETPs) and
how an increasing number of DIY Investors are using
them as part of their investment portfolio.
We start with a basic introduction to the various product
types that are, collectively, ETPs, look at how they
work, and then consider some of the more complex
products that are available and the circumstances in
which you may consider them; we also suggest things
the unwary investor should look out for.
Since the launch of Standard and Poor’s Depository
Receipts (colloquially ‘SPIDERS’) in January 1993 ETPs
have enjoyed great success in the US where they have
attracted 12.5% of investment fund assets – a total
of more than two trillion dollars, half of which is retail
investment.
Europe currently has £500 billion invested in ETPs,
of which just 20% is retail, but the shift to fee based
advice is predicted to see it as the next major growth
region with $1 trillion AUM forecast by 2019; an
additional $40 billion in retail investment in the UK alone
at current levels.
In their simplest form, Exchange Traded Funds (ETFs)
could barely be simpler - a collective investment vehicle
that passively tracks an index of a selected asset
class, anywhere in the world, and seeks to replicate
its performance; the benefits are manifold - with no
expensive fund manager or analysts to pay, ETFs offer
low annual fees, trade like shares on an exchange, are
inherently diverse and automatically rebalance as the
constituents of the chosen index change.
So, using the example of a FTSE 100 tracker, the fund
buys each of the 100 component stocks in a weighting
commensurate to their relative market capitalisation and
you sit back and take maximum benefit, with little lost to
fees.
That’s a traditional, ‘physically replicated’ FTSE 100
UCITS ETF, and iShares will sell you that for 0.07%
- 70p on a £1,000 investment. Other brands are
available.
However, some ETFs only buy a selection of stocks
whilst still looking to return the performance of the
index to keep their costs down, and others buy the
stocks in equal weight to take advantage of historical
out performance; more still apply a complex formula to
identify and maximise returns from companies whose
latent potential may see their performance eclipse that
of the rest of their index – active passive investing!
Pardon?
Yes, then there are ‘synthetically replicated’ ETFs
that don’t buy any of the stocks in the index yet are
guaranteed its performance by a counterparty such as
an investment bank, and products that allow you to bet
on an index going either up or down and giving you the
potential to received amplified gains, or indeed losses,
via leveraged trading.
Woah. But, they’re cheap right?
Well, some are, and most are cheaper than their
actively managed counterparts, but as well as the Total
Expense Ratio (TER), or indeed the Ongoing Charge
Figure (OCF), probably a more accurate figure for the
sake of comparison is the Total Cost of Ownership
