What is an ETF?
An ETF (exchange traded fund) is a
collective investment that's built like a mutual fund—investing in potentially
hundreds, sometimes thousands, of individual securities—but trades on an
exchange throughout the day like a stock.
What's the difference between an ETF and a mutual fund?
ETFs are very similar to mutual funds, but
the biggest differences are that:
Investors can trade ETFs in real-time throughout the trading
day, unlike mutual funds that only trade once a day.
ETFs have lower investment minimums. An ETF's minimum is the
price of a single share, which could be as little as £50, depending on the ETF.
A mutual fund may require £1,000, £3,000, or more to get started.
ETFs have more transparent pricing. ETFs provide real-time
pricing, so you can see their prices change throughout the trading day. A
mutual fund isn't priced until the trading day is over, so you don't know your
price until after you've placed your trade.
ETFs have more transparent reporting. ETFs reveal their full
holdings on a daily basis, unlike mutual funds which often disclose only the
top 10 largest constituents.
What exposures and strategies are available as ETFs?
The first ETFs tracked broad stock
indices like the FTSE 100 and S&P 500. Over time, ETFs have developed to
offer exposure to all major asset classes (equities, bonds, REITS, currencies,
commodities, ESG) as well as sectors, geographic regions, single countries and
systematic investment strategies aka “smart beta”. The new generation of ETFs
are extending the approach to include emerging investment themes (such as Cloud
Technology, Robotics or Future Cars) and even active investment strategies.
Who can buy/invest in an ETF?
Any investor including institutions and
private individuals can invest and trade in ETFs as long as the ETF is
registered for sale in their country.
How do you invest in an ETF?
For individual investors, there are four
main options to invest in an ETF:
Financial advisors: provide advice on ETF selection and
trade on behalf of clients.
buy and sell ETFs on stock exchanges on behalf of their clients. For UK
investors, London Stock Exchange provides a “Find a Broker”
Execution only platforms: online services that allow you to
invest in stocks, bonds and ETFs without offering advice. Examples of UK execution
only platforms on which you can trade ETFs include: AJ Bell, Charles Stanley,
Interactive Investor, IG, Hargreaves Lansdown and SelfTrade.
investment managers: sometimes called “Robo Advisors” provide ETF model
portfolios or discretionary options.
You can trade HANetf ETFs via the following platforms www.hanetf.com/partners
What are the advantages and risks of an ETF?
The key benefits of ETFs include:
Transparency – ETFs disclose their holdings on a daily basis
meaning investors know exactly what assets the ETF holds.
Liquidity – the ability to trade an ETF in real-time
throughout the trading day.
Costs – ETFs are typically cheaper to own than a mutual fund
with the equivalent exposure.
Diversification - ETFs provide investors with the ability to
invest in an entire market index which could cover a broad range of asset
classes, sectors and geographies. This enables investors to spread their
investment and reduce risk compared with investing in single stocks.
Key risks of ETFs can include:
Capital risk – like all investment products, the value of an
ETF can go down as well as up.
Tracking difference - Even after charges are taken into
account, ETFs may not track an index perfectly. The difference between fund
return and index return is called ‘tracking difference”.
There may be other risks that are specific to the exposure
of an ETF – for example Frontier market risk, sector risk, credit risk or
currency risk. These will be made clear in the Key Investor Information
Document (KIID) that is published on every ETF issuer website.
How can I use ETFs?
One of the reasons that ETFs have grown
in popularity is their flexibility. Common uses for ETFs include:
Asset Allocation: Asset allocation can
be difficult for individual investors to manage given the costs and assets
required to achieve proper levels of diversification. ETFs provide investors
with exposure to broad segments of the equity, fixed income, commodity,
currency and REIT markets and cover a range of thematic, style and size
spectrums, enabling investors to build customized investment portfolios in-line
with their financial needs, risk tolerance, and preferences. Both institutional
and individual investors use ETFs to conveniently, efficiently, and cost
effectively allocate their assets.
Trading Tool: The intra-day
trading offered by ETFs enables ETF users to gain short-term exposure to a wide
variety of markets. Historically, investors have relied heavily on derivatives
to achieve short-term exposure. However, for many investors, derivatives are
not always a practical solution. The large denomination of most derivative
contracts can create headwinds for investors, both institutional and private,
from using them to gain market exposure. In this case and in those where
derivative use may be restricted, ETFs are a practical alternative.
Cash Equitisation: Investors typically
seek exposure to equity markets, but often need time to make research and
decide on their investments. ETFs provide a “parking place" for cash that
is designated for equity investment. Because ETFs are liquid, investors can
participate in a market while deciding where to invest the funds for the
longer-term, avoiding potential opportunity costs.
Hedging Risks: ETFs are an
excellent hedging vehicle because they can be borrowed and sold short. The
smaller denominations in which ETFs trade relative to most derivative contracts
provides a more accurate risk exposure match, particularly for small investment
Types of ETFs
What is an index ETF?
The most common type of ETF, providing
market capitalization weighted exposure to a stock or bond index like the FTSE
100, CAC 40 or S&P 500.
What are smart beta ETFs?
Most stock indices,
and the ETFs which track them, weight their constituents according to market
capitalization. Smart beta indices and ETFs use a variety of different
methodologies to weight the constituents and alter the risk/return profile of
the basket. Examples include Equal Weighting, Fundamental Weighting, Volatility
Weighting and Factor Weighting.
What are thematic ETFs?
follows certain social, economic, corporate, demographic, or other themes that
are popular in society, providing exposure to a theme or idea that falls
outside of traditional industry classifications like Oil & Gas or
Healthcare. Examples of investment themes that are accessible via ETFs include
Cloud Computing, Ecommerce, Robotics, BlockChain and Renewable Energy.
are active ETFs?
While most ETFs
provide exposure to a rules-based index, Active ETFs provide exposure to the
discretionary strategy of an asset manager.
are the differences between ETFs, ETCs and ETNs?
An ETC is traded on a
stock exchange, like a stock, but tracks the price of a single commodity or
currency (or a commodity or currency index). This allows investors to gain
exposure to commodity markets without buying futures contracts or the physical
commodity. ETCs have a share price that moves up and down as the price of the
underlying assets fluctuate in value.
ETNs are debt notes issued (normally) by
a bank. When you buy an ETN, the bank promises to pay you a certain pattern of
return. If you buy an ETN linked to the price of gold, for instance, the value
of that ETN in line with the gold price. As an ETN is guaranteed by a bank or
other financial institution, the investor is also exposed to the counterparty
credit risk of that institution.
is physical replication and what is synthetic replication?
Replication is the
means by which the ETF delivers the exposure that it promises. Physical replication
is the most straightforward – the ETF portfolio manager will own the underlying
stocks or bonds that comprise the index exposure. In some cases, the index
construction makes it hard or expensive to buy all of the underlying securities
and an ETF may need to be synthetically replicated. Instead of owning the
underlying securities, the index performance will be delivered by a swap
provided by an investment bank.
happens if an ETF shuts down?
Typically, the ETF
provider will make an announcement about the dates the ETF will stop trading
and when the fund’s assets will be liquidated. The notice is usually about 30
days, giving investors time to find replacement investments or ETFs and to
alter their trading strategy. Once the ETF closes then it will take some time
for the ETF to go through the liquidation process. If you are the owner on
record at the time of the ETF delisting, you will get the cash equivalent value
of the fund’s assets at the time of sale (liquidation), not the value of the
final closing price on the last day of trading.
There will be a few
days lag between the closing bell and the actual execution of the fund’s
liquidation. So there could be slight discrepancies in those prices, as well as
some risk. So, your final cash values could be different than the closing
trading price as they are truly based on the liquidation price. In other words,
the prices of the securities in your fund could increase or decrease during the
time period between the last trade and the final liquidation date. So
definitely consult with your broker or about the values once the process is
ETFs and Tax
there any tax advantages to owning an ETF?
Tax treatment depends on the individual
circumstances of each client and may be subject to change in the future. Similar to conventional index mutual funds, most ETFs try to
track an index, such as the S&P 500. An index ETF only buys and sells
stocks when its benchmark index does. Big changes to the portfolio - like when
a company is added or removed from the index happen according to the index
rules at regular ‘rebalances’ during the year.
ETF managers can use capital losses to
offset capital gains within the fund, reducing, or even eliminating the taxable
capital gains that get passed on to fund shareholders at the end of each year.
Do HANetf ETFs have UK tax reporting status? German
and Italian equivalents?
All HANetf ETFs have UK tax reporting
status. At time of writing (March, 2019) HANetf has applied for equivalent
status in Germany and Italy.
ETFs have capital gains and dividend distributions? If so, can I reinvest them?
Just like mutual funds, ETFs distribute
capital gains (usually in December each year) and dividends (monthly or
quarterly, depending on the ETF). Even though capital gains for index ETFs are
rare, you may face capital gains taxes even if you haven't sold any shares.
Stamp Duty charged on ETF trades?
Stamp duty on UK-domiciled ETFs was
abolished in April 2014. On most UK share purchases there is a transaction fee
called Stamp Duty charged at 0.5%. However, stamp duty is not payable on overseas domiciled ETFs that trade in London. ETFs
from the main providers are all domiciled in Ireland, Luxembourg or France.
hold ETFs in SIPPs and ISAs? (UK)
can be held in SIPPS and ISAs, just like a normal share or mutual fund.
types of ETF trades can I place?
You can place any type of trade that
you would with stocks, including:
Limit orders, which ensure that you get a price in the range
you set—the maximum you're willing to pay or the minimum you're willing to
Market orders, which are likely to execute immediately at
the best available price, but you have less control over the price you pay or
Stop orders, which combine multiple steps: First, you set a
trigger price. When the price of the ETF moves past your trigger price, a
market order is immediately created.
Stop-limit orders, which also combine multiple steps: Like a
stop order, you first set a trigger price. But when the price of the ETF moves
past your trigger price, a limit order is immediately created.
MOC - ETF is executed at
the closing price of the on-exchange ETF listing.
NAV - ETF is executed
relative to the Net Asset Value of the ETF (normally based off the closing
level of the underlying asset).
VWAP / TWAP / Over
the Day - The ETF execution is spread out over the day or over a period,
and is executed in smaller incremental child orders.
Pair Trade / Relative - ETF is executed
relative to a dynamic (or moving) benchmark (either another ETF, a future, or a
ETFs be short-sold?
can be sold short.
ETFs be lent?
can be included in securities lending programmes.
there a minimum investment amount?
Yes, the normal minimum amount of an
ETF an investor can buy is 1 Share. The price of a single share will vary from
ETF to ETF. Some trading platforms offer ‘fractional share dealing’ for ETFs
enabling investors to buy in even smaller amounts.
is the difference between net asset value and price?
fund's market price is the price at
which shares in the ETF can be bought or sold on the exchanges during
trading hours, while the net asset value (NAV) represents the value of each share’s portion of the fund’s
underlying assets and cash at the end of the trading day.
The NAV is determined
by adding up the value of all assets in the fund, including assets and cash,
subtracting any liabilities, and then dividing that value by the number of
outstanding shares in the ETF. It’s basically an indication of the fair value
of a single share of the fund. The NAV is used to compare the performance of
different funds, as well as for accounting purposes.
is an iNAV and how is it used?
Mutual funds only offer NAV at the end
of the trading day. As ETFs trade in real-time throughout the day, an end of
day price would be too infrequent.
The intraday net asset value (“iNAV”)
is a method of establishing a point of reference from which investors can value
their intraday trading opportunities. iNAV provides an intraday indicative
value of an ETF based on the market values of its underlying constituents. The
value is calculated by the listing exchange and then disseminated to the public
every 15 seconds.
expensive it is to trade an ETF? What is TER and TCO?
Total Expense Ratio
(TER) is the estimated annual cost of owning an ETF. TER includes the ETF’s
annual management charge plus other expenses including index licensing fees,
legal fees, administration, marketing, regulation and auditing. TER is quoted
on factsheets and KIIDS.
If an ETF has a TER
of 15bps / 0.15% then an investor will pay £1.50 in annual fees for every
However, TER does not
capture the full cost that an investor will bear when owning an ETF as there
will also be dealing costs, broker spreads and taxes to consider. These costs
will vary for investor to investor. When combined with TER these additional
external costs represent Total Cost of Ownership (TCO).
exposed to currency risk when I trade an ETF?
If an ETF contains
securities which trade in a currency that is different to the investor’s base
currency, then the investor may be exposed to currency risk. For example, if a UK investor purchases an
ETF which U.S. listed securities, then the changes in the value of the US$
relative to £GBP will impact the performance of the fund, as well as the change
in value of the securities. The more volatile the currency, the larger the
potential impact on portfolio returns when measured in the base currency.
currency risk be hedged using an ETF?
Some ETFs embed a
currency hedge into their methodology to help reduce the impact of currency
volatility on ETF returns. This feature will be made clear in the KIID.
liquid are ETFs?
ETF liquidity is a clumsy term. It is
often used colloquially to describe on-exchange traded volumes. The ‘true’
liquidity of an ETF is liquidity that is drawn from the underlying market/asset
being tracked, not trading volumes. Given most of the underlying assets tracked
by ETFs are highly liquid, most ETFs can draw tens to hundreds of USD millions
without having a negative impact on the underlying assets liquidity. This is
ultimately the same whether an ETF has a small amount of investment in it (AUM)
or it doesn’t have significant daily trading volumes.
To understand more about ETF liquidity, listen to our webinar or read our paper.
do ETFs connect to the underlying market?
The direct connection between an ETF
and the underlying market is facilitated by a service provider known as an
Authorised Participant (AP). APs are typically large financial institutions
such as investment banks or specialist trading firms. As shown in the
illustration below, the AP will buy the underlying constituents held by the ETF
in order to create new ETF units (e.g. in the case of a FTSE 100 ETF, the AP
will go and buy shares of all 100 constituent companies in proportion to their
weight in the index).
- Create new ETF units where there is high demand in the market
- Redeem existing ETF units when demand for the ETF decreases
ETF Issuers have
multiple APs and MMs. Please find a full list of the companies supporting
HANetf funds here www.hanetf.com/partners
Who can I speak to for trading advice?
Before buying an ETF, investors should
get investment and tax advice from a professional advisor. If an investor has
questions about trading an ETF, they can contact the Capital Markets desk at
the ETF issuer who will be able to help investors efficiently execute their ETF
At HANetf, our staff have over 25 years
of ETF execution experience and are very happy to consult end investors on
efficient execution. We can also help advise on times of day to trade (if
relevant) and also advise on the most qualified APs and MMs for each ETF and
Jason Griffin, Director of Business
Development and Capital Markets: [email protected]
HANetf is an independent
ETF specialist working with third-party asset managers to bring differentiated,
modern and innovative ETF exposures to European investors. Founded by two of
Europe’s leading ETF entrepreneurs, Hector McNeil and Nik Bienkowski, HANetf
provides a complete operational, regulatory, distribution and marketing
solution for asset managers who want to successfully launch and manage UCITS
HANetf is an
appointed representative of Mirabella Advisers, LLP, which is authorised and
regulated by the Financial Conduct authority (FCA). HANetf ICAV is an
open-ended Irish collective asset management vehicle (registered number
C178625) which is constituted as an umbrella fund with segregated liability
between sub-funds and with variable capital and is authorised by the Central
Bank pursuant to the UCITS Regulations. HANetf Management Limited (registered
number 621172) is authorised and regulated as an UCITS management company by
the Central Bank under the UCITS Regulations.
shareholders are co-CEOs, Hector McNeil and Nik Bienkowski. Other shareholders include
employees and external investors with long-term experience in ETFs, trading and
asset management- P72 Ventures (founded by Steve Cohen), Elkstone Partners, Jim
Wiandt (Founder of ETF.com), Roger Hodenius (co-Founder of FlowTraders) and
Blake Grossman (ex-CEO of Barclays Global Investors).
is a white-label ETF provider?
A white-label ETF
provider provides an operational, regulatory and product management
infrastructure to third-party asset managers who want to launch an ETF. White-label
ETF providers originated in the U.S. but typically provided only the basic
infrastructure needed to launch and operate an ETF. In contrast, HANetf has
extended this model to provide ongoing distribution, sales and marketing
support as part of a fully integrated offering.
Management is a multi-billion-dollar asset management company,
founded in 2000 with operations in North America, Africa, Middle East and
Asia-Pacific. Through the HANetf platform GinsGlobal has launched 2 UCITS ETFs:
Cloud Technologies UCITS ETF (SKYY) and HAN-GINS Innovative Technologies UCITS
EMQQ is an index
created and overseen by Big Tree Capital, a US-based emerging market investment
specialist and provider of NYSE-listed EMQQ ETF. Through the HANetf platform
Big Tree Capital launched the UCITS version of their ETF: EMQQ Emerging Market
Internet and Ecommerce UCITS ETF (EMQQ).
is more you would like to know about ETFs, or about our company, please contact
us via [email protected]
Download our FAQs here.