Understanding ETF’s

Making sure you have some idea of what is in your investment portfolio is always a good idea. Many managed portfolios include ETF’s.  In some ways, exchange-traded funds (ETFs) are similar to "ordinary" unit trusts. They are pooled collections of shares (or other assets such as bonds) that allow investors to buy a diversified portfolio with a single purchase. ETFs tend to be "tracker" funds, meaning that they automatically buy the holdings in a particular index in order to mimic its performance.

ETF’s however differ from conventional trackers because they are traded on the stock market like any other share. This means they can be bought and sold buy easily, and you always know the price. With unit trusts, you place your order but discover the price only when the transaction has gone through. You might think a fund traded on the stock market sounds like an investment trust. However, investment trusts issue a fixed number of shares, whereas ETF shares can be created and cancelled in response to demand. The practical effect of this is that they are very unlikely to trade at a discount or premium to the value of their holdings.

The funds come in two forms. The first type buys the actual shares or bonds found in the index that it aims to track. This kind is called "physically replicating" and is seen as safe, especially for the major indices such as the FTSE 100. The other kind uses complex financial instruments called "derivatives" to mimic the performance of the index concerned.  If you want to know more about the types of investment available or more about the investments made in your portfolio Enable’s Independent Financial Advisors can explain their pros and cons more fully.