Exchange Traded Funds (ETF)
This is a relative newcomer to collective investments, but with time Exchange Traded Funds are anticipated to become very popular. They enable investors to buy into whole indices and sectors as easily as single shares in a company. As an investor, you would become a shareholder of your chosen Exchange Traded Fund.
How do they work?
Exchange Traded Funds are used to replicate the performance of particular markets; for example, by tracking the value of the FTSE 100. The risks will differ according to which market or sector the fund is designed to track.
You, along with other investors, purchase shares in a specific ETF, which are traded throughout the day. As a shareholder, in theory, if your fund index does well, it attracts more investors and the share price increases.
How are shares priced?
ETF funds are listed on the Stock Exchange. Like any listed shares, the prices change continuously throughout the day. ETFs are 'open-ended' companies and shares can be created or cancelled by new investment into the fund. For individual investors, the benefits are that you can time your entry and exit into the market based upon the share price. The open-ended process means the price of an ETF share is generally very close to actual value of the share.
What income will you receive?
Investors receive dividend payments, although, some ETFs reinvest investors dividends. And of course, investors selling their ETF shares on the Stock Exchange at the right time could make significant profits.
What are the risks v returns?
As with any form of share trading, shifts in value can be larger and there's a certain degree of risk. By taking shares in a fund that invests across an entire index, rather than one company, the spread of risks is much broader. With different investment options available, you can choose one you feel comfortable with. Obviously, if the whole of your fund index drops suddenly, the overall fund share price can fall quite dramatically.
Realistically, they are intended to be a long-term investment, aimed at people happy to stay with the investment for more than five years.
What are the costs?
Of all the collective investment products, they have the lowest annual charges. If you are a primary investor, shares can only be purchased through a specialist adviser or stockbroker, so you'll incur dealing costs.
Fees are always clearly published, but it's important to cross compare to source the best deal. Remember, any charges will reduce the gains or increase the loss your fund makes.
Need more help?
If the thought of ETFs excite you, then we'll happily explain more. Call us today for more information.
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