Index Investing
In this section…
Analysis
ETF PRODUCT
CATEGORISATIONS 53-56
“Some commentators are
debating whether or not ETFs
should be further categorised
as to whether they use
contracts for difference,
options or shorting to help
investors. In my [Alan Miller
of Spencer-Churchill Miller
Private] view there is a more
basic issue of clarification in
terms of product
categorisation and investor
education that needs to be
addressed first”
ETF 53-54
“Exchange-traded funds offer the best legal protection as
they follow a mutual fund structure…are always subject to
investor protections and regulators of Ucits…cover many
well known indices and exchanges…though the recent
explosion in listings has led many ETFs which do not offer
these characteristics in full”
ETC 54-55
“Most exchange-traded commodities implement a futures
trading strategy…do not follow a fund structure and
are therefore unlikely to fall under the remit of the FSA
compensation scheme…cannot be Ucits compliant…tend
to be single product and therefore much more volatile than
more diversified commodity ETFs”
ETN 55-56
“Exchange-traded notes trade on an exchange like an ETF
with one significant difference – they are debt securities,
not equity securities. When investors buy an ETN they are
buying a promise that the issuer will pay the note…and that
carries significantly more risk than an ETF”
Sorting through the tangle
Such has been the explosion of exchange-traded products
in the past few years in the UK that the newer iterations
are moving away from the simple, transparent, low cost
original products. Some have said that the whole sector is
becoming overly-complicated, and unnecessarily so, and
that they should be recategorised.
Alan Miller, who manages client portfolios that use
ETFs exclusively, argues that before this there is a great
deal more product categorisation and investor education
needed. They need to know more about how an ETF
differs from an ETN, and how an ETC can be worked into a
portfolio. Above all, they need to know whether what they
are buying is actually an exchange-traded fund.
■ At the end of 2009, there were $151bn invested globally
in exchange-traded products – as opposed to ETFs
– from 37 providers, listed on 18 exchanges.
■ So far this year, ETFs based on utilities have been the
most popular, with $175bn of new assets (net), and
media ($159bn).
■ The least popular have been telecommunications, with
$169bn of net outflows.
Source: BlackRock
52 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
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