Exchange Traded Funds: your questions answered
What are exchange traded funds?
ETFs (Exchange Traded Funds) are open-ended index-tracking funds that are traded on an exchange just like shares. ETFs provide investors with diversification in one single trade and access to multiple market segments and asset classes, including stocks, bonds and commodities.
In contrast to traditional mutual funds, ETFs are listed and traded on exchanges. They combine the liquidity benefits of trading stocks on a regulated exchange throughout the day and the diversification provided by a traditional fund.
ETFs are low-cost and transparent investment tools. Costs include an annual management fee (Total Expense Ratio or TER) and trading commissions paid to a broker to buy and sell ETF units. ETFs can be easily purchased or sold directly through a brokerage account or fund platform. In the UK, they are ISA (Individual Savings Account) and SIPP (Self-Invested Personal Pension) eligible and do not incur stamp duty when purchased on the London Stock Exchange (LSE). Most ETFs in Europe are UCITS funds. There are certain risks that investors must consider when evaluating ETFs and therefore they may not be suitable for everyone. Investors’ capital is at risk and they can lose up to the entire amount originally invested. The indices tracked by an ETF may be volatile and currency risk exists if the ETF is quoted on an exchange in a different currency to the index. There is limited counterparty and other risks related to a fund’s index-tracking mechanism which is specific to how the ETF is managed.
What is the real liquidity provided by ETFs?
There are two levels of liquidity which are represented by the primary and secondary markets for ETFs. By definition, ETFs are exchange-traded products. This refers to secondary market liquidity which is created by continuous trading on an exchange such as the London Stock Exchange. ETF market makers provide prices throughout the trading day which are reflected in bid/offer spreads quoted for a specific size as displayed in the order book for a particular ETF. As a result, investors can buy and sell ETFs just like shares.
In addition, there is also a primary market for ETFs which provides a creation and redemption mechanism for ETF units and direct access to the underlying index or market tracked by an ETF. ETF providers work with multiple liquidity providers or authorized ETF participants which can create and redeem ETF units. Therefore, the liquidity available on the exchange or secondary market does not necessarily reflect the real liquidity of an ETF as numerous market participants can access the underlying market to issue more units or redeem existing ones regardless of the current depth of the order book for the ETF on an exchange.
Which markets and asset classes can investors access with ETFs and what are likely to be the next innovations?
There are many ETFs available that provide access to Developed Markets such as the UK, Europe, US and Japan; Emerging Markets including China, Brazil and India; Government and Corporate Bonds; and Broad-Based Commodities for a diversified exposure to the asset class.
We expect the ETF industry to continue to expand in 2010 and beyond. Investors continue to embrace ETFs as liquid and cost-efficient tools which can help them manage their portfolios in an effective way.
Lyxor and Lyxor ETF are names used by Société Générale to promote the products of Lyxor Asset Management.
• LYXOR AM is the 4th ETF provider in the world, and, the 2nd in Europe with 20.4% of market share and EUR 32.4Bn of Assets under Management. LYXOR AuM increased its assets of +33% over the year with net inflows of EUR 8Bn.
• LYXOR’s range is comprised of 160 ETFs and 397 cross-listings worldwide covering all asset classes (Equity, Fixed income, Cash and Commodities) and geographical areas (Europe, US, Asia, Africa), along with, an extended variety of investment strategies (Leveraged, Shortx2, BuyWrite, Covered Call, Fundamental etc.).
• LYXOR manages the largest ETF in Europe, the Lyxor ETF DJ Euro Stoxx 50 (TER: 0.25%) with EUR 5.6Bn of Assets under Management, as well as, the largest European Sector Equity ETF range (TER: 0.30%) with more than EUR 2BN of assets currently in the funds and 30% of market share.
• In addition, LYXOR manages the 2nd largest Emerging Equity ETF range (TER: 0.65%, except for India and Pan-Africa with a TER of 0.85%) with close to EUR 6Bn of Assets under Management, 32.3% of market share and a 2009 AUM increase of +215% when the Emerging Peer group did +196% over the year. As a result, 5 out of the 10 ETFs which have collected the most were Lyxor ETFs.
by Claus Hein, Head of Lyxor ETFs - UK, Nordics & Latam
For more information: call 0800 707 6956 or visit www.lyxoretf.co.uk or email info@lyxoretf.co.uk or Bloomberg: LYXOR
