An exchange traded fund is an investment fund that trades on a stock exchange, much like a share. An ETF holds assets such as shares, commodities or bonds and generally trades close to its net asset value over the course of the trading day.
ETFs combine many of the benefits of a unit trust fund with low costs and the tradability of a normal share. ETFs trade on exchanges in the same manner as shares and can be bought and sold during normal trading hours.
What are Exchange Traded Commodities (ETCs)?
An Exchange Traded Commodity (ETC) is an investment vehicle that tracks the performance of an underlying commodity or basket of commodities, such as Crude Oil or Gold. It is a variation on the ETF. Similar though not identical to ETFs, and traded and settled exactly like normal shares, ETCs allow investors to gain exposure to commodities, on exchange, during market hours.
Range of Asset Classes
A wide range of asset classes are covered by ETFs and ETCs. As well as providing investment exposure to global equity indices, such as the S&P500, ETFs also provide exposure to bonds and an ever increasing coverage of sectors, regions and currencies. ETFs and ETCs, like investment funds, incur an annual management fee within the investments, although the fees are typically lower than investment funds. They also have the added benefit of full transparency, on-exchange price information and ease of dealing.
ETFs and ETCs can offer diversity, liquidity and a range of coverage across the following asset classes:
Similar to shares, investing in ETFs or ETCs is not without risk. ETF and ETC prices can be volatile. The overall market may fall, or the ETFs or ETCs that you invest in may perform badly. Although some ETFs and ETCs are intended to track an index, they are unlikely to perfectly replicate the performance of the index.
Other risks include, but are not limited to, the following:
- Investors may not benefit from the same entitlements as if they held the shares directly (e.g. voting rights).
- Costs can be significant and can be difficult to define precisely. While the annual management charge may be stipulated, other charges may be less visible.
- Investors cannot control the investments that are made within the ETF. This discretion is held by the Investment Manager appointed by the third-party investment fund provider.
- Although an ETF may be denominated in a particular currency, underlying investments may be held in other currencies and thus the ETF may be subject to currency moves.
- Counterparty risk should be considered when acquiring ETCs in particular, as funds invested are generally held with a counterparty. While funds invested in ETFs may also be held with a counterparty, they are generally invested in securities.