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Exchange Traded Funds (Advantages (Trade at or very close to NAV and track…
Exchange Traded Funds
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Allow investors to gain exposure to many companies or underlying assets with a single purchase although similar to index tracker funds, they allow greater flexibility
Issued by way of an IPO. The proceeds raised are then used to buy a portfolio which more or less (but not exactly) mirrors particular index and will then track that particular index or sector
The created shares are issued and given to a market maker in exchange for an entire portfolio of shares with the ETF fund manager. There is no cash exchange. The creation and cancellation of units is strictly between them
The fund manager will create or redeem shares in exchange for securities which are then traded to other investors by the market maker at a bid and offer price – supply and demand
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The price of the shares will more or less reflect the index on which the ETF is traded but not exactly
ETF shares are created by receiving underlying shares from market makers and redeemed by returning underlying shares to the market maker
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Advantages
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Charges are relatively low, there is no initial charge with ETFs and there are no brokerage charges between ETF managers and market makers which keeps charges down
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Regarded as a particularly good way of investing in international markets because an investor is buying that markets index
ETFs shares are quoted on a sock market but they are not affected by premiums and discounts as the dealing price reflects the market index minus fund fees and a small tracking error
The disadvantage is that as no commissions are paid to IFAs, they tend not to recommend them
European ETFs are covered by UCITs legislation with assets held by a custodian. There is no counterparty exposure for ETFs investing in securities under UCITs but a commodity based ETF is likely to require one