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Male Speaker: A lot of them because they allow me to continually funds in and I know that they are just going to be following on the markets as doing it means that I don’t necessarily have to keep an eye every single day.

Female Speaker: Well I am not really very keen on them because it’s sort of the head mentality is what I feel. They say there’s always going to be tracking. So as it’s going down, it’s going to be going down and tracking that at times say, no I am not never been very keen on them.

Male Speaker: From what I know they are very low cost and low commission rates and easy to use, especially online.

Stephen Barbar: Hello and welcome to Stock Talk; Selftrade’s regular program discussing investments, markets and financial planning. This edition takes a closer look at Exchange Traded Funds, ETFs; and ask what are they, what makes them special and how can they be used in the balance portfolio. ETFs are passively-managed instruments which track a range of market in the season sectors from Britain to Europe, North America, Brazil, Russia, India and China. They combine the characteristics of a quoted instrument like a share with a more traditional fund, a hybrid if you like between an OEIC and investment trust.

Launched in the UK back in 2000 there’s been an explosion in issues, and issues since 2006, when regulatory and taxation changes made London a more attractive home for the product. There’s plenty you will need to know if you are thinking about investing in and getting the most out of ETFs. In this program, which is I am to help you do just that. Over the next few minutes, we will be talking to Dan Draper of Lyxor; I am giving you an ETF insight.

But first his equity construction to Exchange Traded Funds. ETFs are index tracking funds offering access to markets across the world. But what makes them so innovative and how can you invest? So what is an ETF; well Unit Trust and OEICs with which most people are familiar and what’s called Open Ended. This means that new units are created when investors buy, and they are canceled when they sell. The instrument trades at Net Asset Value of the fund. That’s the some of its part divided by the number of units and they usually price just once a day.

Equities such as investment trust or shares are different. Close Ended, they are quoted on the stock exchange throughout the day and have a fixed number of shares and issue. The prices, therefore, are determined by supply and demand. Now imagine a mix of these. An Open Ended fund, trading at net asset value which is quoted on the stock exchange. Well, then you have an exchange traded fund. Throw in to mix low charges, transparency and excellent liquidity, meaning you can sell, whenever the markets and it’s little one that ETFs have established themselves as a staple portfolio component.

Most ETFs are index trackers and the range of underlines is what makes them especially attractive. FTSE 100 tracker might be the most popular and it’s only the beginning of an ever growing selection. The choice of ETFs includes Indices, such as UK, Europe, Asia, USA, Russia and South America. It means property, water, infrastructure, private equity, bonds, commodities such as metals, agriculture, life stock, energy and these new fundamental ETFs.

So how do you invest in an ETF? Well, it’s simple. Since they are quoted on the London Stock Exchange, they are as easy to buy as shares and cheaper too. Since like funds they don’t attract stamp duty. Prices are available throughout the day, changing with the Net Asset Value of the fund. ETFs are highly flexible instruments which can be held in the range of account including dealing, ISA, SIPP and even self-select Child Trust Funds. So ETFs are cost effective, transparent and liquid index trackers. For the real detail on the product we spoke to Dan Draper of Lyxor. I started by asking, why ETFs have such comparatively low profile when compare to traditional funds.

Dan Draper: ETFs are new. That’s really the main reason; new innovation. The concept, idea, the theory if you will; it really started back in the 1950s when people started thinking about investment in terms of portfolio and diversification. But that really led through the technology, innovations, lower trading cost, in particular through the 70s, 80s and 90s, and really ETFs started really getting profile in the press and among the public in the last five or six years.

Stephen Barbar: Are they complex? How would you describe these products in a very straight forward way?

Dan Draper: Now I think the simplicity of an ETF really does derive from what you are trying to accomplish, the end goal. And that idea again comes from the basic idea that if you allocate your assets the correct way, in most efficient way that gives you the highest chance of succeeding your wealth goals. And so from that perspective looking backwards, then you think what’s the cheapest way for me to do this? And that’s why ETFs are simple. It gives you a top down ability to pick the right asset classes in the right amounts for your particular wealth goals.

Stephen Barbar: Are they for trading there or for long term savings?

Dan Draper: Really both; because if you look at what an ETF is, it’s really a marriage of an Open Ended Investment Company, an OEIC with a basket of shares. And as I mentioned earlier it’s that ability to the trading cost, the technologies of trading large basket of shares, i.e. in a particular index. That FTSE 100, the SMP 500 what have you. It set ability to trade them instantaneously, all at once. But then putting them into an Open Ended Fund that makes them the simplistic instruments they are; but also giving an investor the ability to buy as little as just one share. So it’s taking things that institutions 20 years ago, would have to do in large sizes, millions of pounds. Now we have it in a format where —

Posted: 08/27/2008 | Views: 2,652 | Duration: 06:07