What are ETFs

ETFs are index tracking funds that are traded on an exchange such as the London Stock Exchange. They combine the ready-made diversification of unit trusts with the simplicity of shares. They are eligible for ISAs but attract no stamp duty, ETFs have some of the lowest annual charges of all collective investment schemes. First introduced in 2000, there are now a number of ETFs available, tracking equity and fixed income indices in the UK and around the world.

In 2006 the London Stock Exchange became the world’s first exchange to offer a multi-currency trading service for ETFs giving investors a tax-efficient and currency risk-free alternative to buying ETFs in the US markets.

A summary of how ETFs compare to similar products:

	ETF	Unit Trust	Investment Trust
Structure	Open-ended. Price directly linked to NAV	Open-ended. Price directly linked to NAV	Closed-ended. Price indirectly linked to NAV and driven my market
Trading	Anytime during market hours at real-time prices	Once a day on unknown future prices	Anytime during market hours
Buy	Through a broker	From Fund Manager, Supermarket or IFA	Through a broker
Unit/Shares price	Close to NAV (minimal tracking error)	At NAV (once in 24 hours)	At discount or premium
Investment style	Tracker	Active or Tracker	Active (small no. of tracker)
Stamp duty (on purchase)	No	No	Yes
Initial charges	0 + broker’s fee	Up to 1% & broker’s fee (if through broker)	Typically 0 + broker’s fee
Annual charges	0.20 – 0.75%	Up to 1.75%	Typically around 1%
PEP/ISAble	Yes	Yes	Yes

With ETFs the fees are minimal, and trading is much more convenient. You don’t have to write off a whole load of forms, you can buy and sell within a day.’

Justin Urquhart-Stewart, 7 Investment Management

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ETPs segment sectors