Exchange Traded Products and Trading FAQs

Your broker should be able to buy or sell ETFs, ETCs & ETNs as they are listed on regulated exchanges. Most brokers should be able to facilitate any required foreign exchange conversion as part of the transaction. If not, please contact the ETP issuer who will put you in touch with an alternative broker that can execute your order.

An ETP may also have a bid-ask spread, which is the difference between the highest price buyers are willing to pay and the lowest price sellers are willing to accept. Your broker or financial adviser may also charge you normal transactions costs (commissions) associated with the purchase or sale of ETPs and may have a fee associated with their platform.

ETP liquidity is supported by market makers and authorised participants who can create or redeem units when needed. As a result, liquidity is often linked to the liquidity of the underlying assets rather than solely the volume traded on the exchange.

The price of ETPs can go up or down, however investors can lose some or all of their investment if the value of the underlying assets falls. Most ETPs do not require investors to contribute more than their original investment.

An ETF (Exchange Traded Fund) is an investment fund that holds a basket of assets, such as shares and/or bonds and trades on a stock exchange like a share. ETFs may track an index, such as the FTSE 100, or be actively managed.

You can buy ETFs in much the same way as shares, through a brokerage account or investment platform, provided the ETF you want is available on that platform. Once your account is set up, you can typically place an order to buy or sell ETF units during normal stock market trading hours.

ETFs are priced throughout the trading day based on supply and demand in the market, just like shares. The price is determined by what buyers are willing to pay, and sellers are willing to accept, although it is usually kept very close to the value of the underlying assets the ETF holds through the actions of market makers and authorised participants.

Given their nature as investment funds containing openly traded securities, investors should bear the following points in mind when trading ETFs:

• Neither the capital nor the dividends are guaranteed
• As the assets under management are stocks, bonds or commodities they are vulnerable to price fluctuations
• Close tracking of the underlying assets can be difficult during periods of market volatility

• Comprehensible and easy to use
• ETFs can track indices where the data is readily accessible on financial news websites, market data services and investment platforms
• As ETFs can mirror a market, there is no need to investigate individual companies' financial and business results, thus simplifying investment decisions.
• Potentially lower company-specific risk than investing in a single share because ETFs typically provide diversified exposure across multiple holdings. In other words, the risks involved are reduced by spreading them across a wider range of securities.
• Transparency – investors can usually view the underlying holdings of an ETF on a regular basis.
• Intraday tradability – ETFs can be bought and sold throughout the day like shares.
• Tax efficient – ETFs are not subject to Stamp Duty. If held directly, they are eligible for Capital Gains Tax treatment.
• ISA and SIPP eligible – ETFs can be held in an ISA or SIPP.

ETF transactions are subject to the same fees as share transactions. They are subject to Income and Capital Gains Tax in the same way as shares and there is a management charge levied by the issuer. An ETF may also have a bid-ask spread, which is the difference between the highest price buyers are willing to pay and the lowest price sellers are willing to accept.

Investors may also incur platform fees charged by their broker or investment platform.

The wide range of trading strategies available using ETFs mean that they can be suitable for the largest institutional investor through to the private investor.

ETFs are commonly used to gain exposure to market indices. However, they can also be used as part of active strategies in conjunction with other funds or individual securities. ETFs are also useful in short term tactical strategies as well as longer term investments. Suitability depends on the specific requirements of the individual investor and those unsure should seek professional advice.

ETFs are typically very cost-efficient. However, like other securities, every time an investor makes a purchase or sale, they often pay brokerage costs. In addition, the ETF investor can suffer from the usual costs of trading securities, such as differences in the bid-ask spread.

The unique structure of ETFs offers several advantages to investors:

• Buy or sell at any time during the day, not just at the end of the day as is the case with managed funds
• Invest in a portfolio of securities with one trade

ETCs are simple and transparent open-ended securities which trade on regulated exchanges. ETCs enable investors to gain exposure to commodities without trading futures or taking physical delivery.

ETCs are similar to ETFs because they are both open-ended, continuously traded and often have multiple market makers. The main difference is that ETCs typically use a secured, undated, zero coupon note structure, whereas ETFs typically use a fund structure.

• Comprehensible and easy to use – As index ETC can mirror a broader market so there may be no need to investigate individual commodities thus simplifying investment decisions.
• Low tracking error – The open-ended nature of these securities ensures tracking error is minimised and creates an arbitrage opportunity should the price drift away from the NAV.
• Open-ended – New securities can generally be created or redeemed to help keep prices close to the value of the underlying exposure.
• Liquid – ETCs are open-ended and can be created on-demand. Additionally, market makers are typically required to provide continuous on-book quotes during market hours, helping support liquidity.
• Constant trading during open market hours – ETCs can be traded at any time during open hours. Investors can check prices and place orders just like for stocks.
• Tax efficient – ETCs are not subject to Stamp Duty or Stamp Duty Reserve Tax. If held directly, they are eligible for Capital Gains Tax treatment.
• ISA and SIPP eligible – ETCs can be held in an ISA or SIPP.

The wide range of trading strategies available using ETCs mean that they can be suitable for the largest institutional investor through to the private investor. Although primarily a passive tool, ETCs are commonly utilised as part of active strategies and can be useful in short term tactical strategies as well as longer term investments. It really depends on the specific requirements of the individual investor and those unsure should seek professional advice.

ETCs can be bought and sold through a brokerage account or investment platform during normal market trading hours.

ETCs priced off futures aim to be correlated with the underlying commodity price; however the spot price return is not an investable return. ETCs are designed to earn a return similar to that which could be earned from investing in the underlying commodity futures markets.

ETCs which are physically backed are priced directly off the metal spot price and therefore returns are typically closely correlated to the underlying price. These ETCs track the precious metals price less fees charged by the issuer.

Some ETCs (e.g. ETFs oil securities and ETFs commodity securities) are priced off futures as it is not possible to store the underlying commodity. In addition, futures pricing can be more liquid and efficient for some commodities, especially where the futures contract helps to standardise the pricing, e.g. agricultural commodities where quality can vary between crops, seasons and regions.

In the case of physically backed ETCs, precious metals are homogenous, can be stored easily and do not decay. They can therefore be priced directly off the underlying physical commodity.

ETCs are not subject to Stamp Duty or Stamp Duty Reserve Tax.

Yes. ETCs are eligible investments for ISAs and SIPPs.

Investors should consult their own professional advisers on the implications of their subscribing for, purchasing, holding, switching or disposing of ETCs under the laws of the jurisdiction in which they may be subject to tax. Tax legislation may change.

Eligibility for compensation schemes depends on the product structure, issuer and circumstances of any loss. Investors should review the product documentation and consult their financial adviser if they are unsure.

For the physically backed ETCs you may be able to arrange for physical delivery of the commodity with the ETC issuer.