Learn about ETFs

What are ETFs?

Exchange traded funds (ETFs) are pooled investment vehicles that track the performance of underlying financial indexes or the prices of commodities. They are listed as shares on stock exchanges, where they can be traded like any other security

What are the benefits of investing in ETFs?

ETFs are efficient, transparent and flexible and offer diversification and market performance. These benefits include:

• ETFs have low fees and costs while closely tracking the underlying indexes or commodity prices with low tracking error. A key reason that costs are low is because ETFs track a benchmark and as such do not have the large overheads associated with employing large teams to ‘actively’ manage the fund.
• ETFs are traded openly on stock exchanges with real pricing in exchange trading hours, making them highly transparent investment vehicles. Prices are publicly available on exchange listings and wire services. Closing prices are often listed in national newspapers. The factsheets of ETFs will usually list their top 10 holdings while the full listings can be found on the website of an ETF’s provider
• Intra-day trading means ETFs are highly liquid and they can be traded in all sizes of trades, whether for long term strategies or tactical trades
• Some ETFs enable investors to invest in a basket of securities, providing diversification in just one share
• ETFs closely track indexes and the prices of commodities, delivering to a high degree of accuracy the market performance that investors expect

What are the risks of investing in ETFs?

The brochures and product information on ETFs should detail the risks associated with specific ETFs. However, there are some risks that are general to ETFs. These include:

• As with many other investment products, the underlying investments tracked by ETFs can go up or down, depending on market factors
• ETFs may be denominated or traded in currencies other than an investor’s domestic currency. If there is no ‘currency hedging’ by the ETF then changes in exchange rates will alter the value of investments to investors, either positively or adversely. However, many ETFs are currency hedged
• Regulatory and legal changes can force changes in investment objectives and policies that could impact negatively on investment performance
• If there is any counterparty exposure and the counterparty fails, an ETF may suffer losses if it is insufficiently collaterised
• Liquidity risk – if the underlying assets tracked by an ETF become illiquid then this is likely to impact the liquidity of the ETF. In particular, this can sometimes be an issue in emerging markets

Would the terms of FinEx ETFs be any different if markets were to get difficult?

FinEx ETFs are designed to closely track their underlying indexes or commodities, irrespective of whether markets are rising or falling

Why should retail investors consider investing in ETFs?

ETFs can be bought and sold on stock exchanges like any other share. As such, they are available to any investor, large and small. There are no separate share classes for specific investors giving preferential fee structures. The benefits of ETFs, specifically their low cost, flexibility, diversification, transparency and real time pricing are of benefit to all investors. The vast range of ETFs available can be used to enhance and diversify portfolios, and they are increasingly available within pension and other savings plans and products, such as funds of ETFs. However, it is recommended that retail investors seek professional financial advice.

Why would ETFs be attractive to institutional investors and active managers?

ETFs can help reduce costs and enhance returns in any. They can be used as a cost-effective “core” but their increasing sophistication and the access they provide to specific regions, countries, industrial sectors and other investment strategies mean they offer options rarely provided by any other form of investment. Active managers, who are increasingly required to justify their fees, find it increasingly hard to pick the individual stocks that will help them to outperform because so much knowledge about companies is available to all investors. Active managers can find it easier to outperform by applying their market insights to selecting indexes rather than individual stocks.

Larger portfolios can use ETFs for both short and long term strategies. They can be used to put short term cash deposits to work and execute tactical trading strategies; to adjust, or ‘transition’ long term exposures from certain assets into others; gain exposure to more ‘exotic’ or specific markets and alternative asset classes; construct long term core exposures; structure long/short strategies without recourse to over the counter derivatives; and earn extra revenue through lending ETFs to other investors.

For asset managers and institutions, ETFs also have advantages over other index tracking vehicles. For example, whereas trading in derivatives and futures is highly complicated, ETFs can be easily traded on the stock exchange. Also, ETFs tend to have lower management fees than mutual or other index funds, which usually have only one trading point a day versus the greater trading flexibility of ETFs. With regards to certificates and notes, ETFs have the advantage of being regulated.

What does the UCITS IV Directive mean for investors?

The European Union’s UCITS IV Directive tightened up the regulatory requirements placed on investment funds. In an effort to make funds more accessible and easily understood to investors, the Directive launched the Key Investor Information Document (KIID), which provided a template outlining the information that has to be given to investors on a regular basis, including fees, risk exposure, holdings and an overview of investment strategy.

Where can I find the market price of FinEx ETFs?

The price of FinEx ETFs can normally be found listed on the stock exchange where it trades and on websites of market data providers, or by contacting your broker.

Where can I find out the Net Asset Values (NAVs) of FinEx ETFs?

These are listed on the FinExETF website on a daily basis and they can also be found on the factsheets for our products.

How Can an ETF’s liquidity be measured?

The liquidity of ETFs comes in both the primaryand secondary markets. On the secondary market, specialist trading houses are involved in the market making and trading of ETFs across the world, thus acting as providers of liquidity for such products to stock and share brokers. On the primary market, these specialist trading house are able to create and redeem ETF shares directly with the ETF Issuer, this has advantages for secondary market trading as prices are close to the NAV. The liquidity of an ETF is measured by the liquidity of the constituents of its underlying index rather than the trading volume of the ETF on the stock exchange.

Can ETFs pay dividends?

Yes, but investors need to check, if applicable, that this is the case with ETFs that they invest in and whether they are invested in ‘income’ or ‘accumulation’ share classes.

What is the cost of investing in ETFs?

ETFs charge fees like any other pooled fund. However, these fees do tend to be lower than other forms of investment funds. They are also more transparent as ETF fees are stated as a “TER” (Total Expense Ratio). This fee is an all-inclusive fee that the ETF charges, although broker commission and trading fees for buying and selling ETFs usually apply.

How do ETFs tracking long indices compare with other mutual funds?

Actively managed mutual funds do not have a great track record for outperforming or even equalling their underlying benchmarks, especially when the extra charges that normally apply are taken into account. For example, the Standard & Poor’s Indices Versus Active (SPIVA) Scorecard research has regularly revealed the underperformance of active funds. The SPIVA 10-year anniversary report pointed to a long term trend and consistent trend for a large percentage of active managers to underperform. In one five-year period, 65.44% of large-cap active managers lagged the S&P 500; 81.57% of mid-cap funds lagged the S&P MidCap 400 and 77.3% of the small-cap funds underperformed the S&P SmallCap 600. Each year, the underperformance of active managers destroys investor's wealth. The risks of underperforming benchmarks is greatly reduced by ETFs, which tend to be much more cost effective than other mutual funds. Investors are often just looking for reliable beta from the funds they invest in and look to achieve alpha in their asset allocation, which is generally regarded as accounting for the majority of investment returns.

Can investors subscribe or redeem shares of ETFs directly from FinEx?

No. Under normal market circumstances, the creation and redemption of ETF shares is only allowed via Authorised participants (APs).

How is the Net Asset Value (“NAV”) of FinEx ETFs calculated?

The NAVs of FinEx ETFs are calculated daily and equal the sum of an ETF’s assets minus the ETF’s liabilities, both valued by reference to the market close prices on the day the NAV is calculated. As such, the NAV of an ETF is essentially affected by the value of the underlying portfolio of assets of the ETF and the performance of the underlying index. The NAV per share is obtained by further dividing the resulting figure by the number of outstanding shares of the ETF on that day. The NAVs of FinEx ETFs are available daily on www.FinExETF.com.

How does FinEx mitigate counterparty risk exposure?

Counterparty risk is present in just about every financial product. FinEx mitigates this risk with the use of collateral. The extent to which this is used is available on our website www.FinExETF.com. Like all ETFs, FinEx’s products are fully regulated.

Are ETFs suitable for short term investing?

Yes. ETFs can be traded throughout a trading day but the exposure they provide to many niche investments and strategies, such as industry sectors and particular countries, means they can be used for short term, tactical investing.

Are ETFs suitable for long-term investing?

Yes. The low charging structure relative to mutual funds means that they are a cost effective way to achieve long term exposure to specific indexes.

What are the factors influencing the trading price of an ETF?

ETF shares should closelyreflect the price movement of the underlying assets they track. In addition, like any other asset; supply and demand drives the market prices of ETFs. If there is more buying pressure, prices rise and vice versa. In normal market conditions, however, the trading price will be a very close reflection of the Net Asset Value of the ETFdue to the open ended nature of ETFs, which means shares can be created or redeemed to match demand. ETFs that track indexes in other time zones that are closed for whole or part of its trading day will see the price diverge more from the iNAV than if the index was trading in the same time zone.

How successful have ETFs been?

The success of ETFs is amply demonstrated by the phenomenal growth story that they represent. The first ETF was launched in the US in 1993 and seven years later they were introduced to Europe. The ETF industry has grown exponentially and while estimates vary, by the end of Q3 2012 there was most likely more than US$1.6 trillion held in more than 3,000 ETF funds globally. The reasons for this success include growing interest in low cost index tracking investments and the advantages ETFs offer versus other investment vehicles.

Why buy FinEx ETFs?

FinEx is an innovator and only issues regulated products. For example,the FinEx Physically Held Gold Fund is the first regulated Gold ETF in the Eurozone. The products and their location listings are also unique: the FinEx Barclays Tradable Russian Corporate Bonds UCITS ETF, for example, is the first ETF to offer exposure to Russian corporate bonds (as of launch date).In addition, FinEx will strive to list in other global markets where ETF are not readily available such as Moscow. But FinEx is also committed to provide unique and transparent regulated exchange traded products that are well managed and conform to best practice techniques. The difference is our products and where we list. Investors can rest assured our products are regulated to a high standard and constructed and managed by an experienced and professional team.

How is the Yield calculated on Currency Hedged ETF?

The Yield is calculated by adding the historical yield of the index plus or minus the interest differential represented in the currency hedge, i.e. differential between the USD and RUB spot.