INDEX INVESTING EXCHANGE-TRADED PRODUCTS
Clearer labelling required
The evolving market place for passives has seen a plethora of new
exchange-traded products rolled out. But should there be greater
categorisation and warnings about the different product types?
BY ALAN MILLER, CO-
FOUNDER, SPENCER-
CHURCHILL MILLER
PRIVATE
There is no denying
exchange-traded funds
(ETFs) are attractive as they
offer choice, flexibility, low
costs and tax efficiency,
among other benefits; and
they are growing like
wildfire.
But as with all things
that look too good to be
true, there are downsides.
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
view there is a more basic
issue of clarification in
terms of product categorisation
and investor education
that needs to be
addressed before discussing
classification.
l Mistaken identity
When an investor is looking
to invest/buy an ETF,
the most important item
that needs to be made
crystal clear is whether or
not it really is an ETF.
Many people will find out
too late that they have not
bought an ETF but an
exchange-traded commod-
ity (ETC) or an exchangetraded
note (ETN). These
have significant legal and
tax differences, which
every investor needs to
consider before any investment.
The chart on page
55 shows that over a quarter
of exchange-traded
products listed on the stock
exchange are actually
ETCs, not ETFs. I believe a
large number of unsuspecting
investors are
buying ETCs without
knowledge of the extra
risks implicit in them.
Those seeking to invest
in exchange-traded products
need to be aware of
the different categories
available and what differentiates
them.
The vast majority of
exchange-traded products
are ETFs – in January 2010
they accounted for 72.5%
of the total. Back in 2005,
the London Stock Exchange
cited ETFs as “essentially
straightforward products –
index-tracking instruments
– but in the hands of a skilful
professional investor
they become the building
blocks of sophisticated
investment strategies”.
l Market growth
Five years later, the market
place for ETFs has grown
exponentially with the ability
to gain exposure to
both traditional and alternative
asset classes on a
global scale. The amount
of assets held by ETFs has
climbed above $1,000bn
for the first time, highlighting
the growing popularity
of these types of
investment.
The figure at the end of
SUMMARY
ETFs offer investors the best
legal protection as they follow
a mutual fund structure and
are almost always subject to
the investor protections and
regulations of Ucits.
Consideration of counterparty
risk is essential, particularly
when using ETNs.
The tax treatment of ETFs
has been amended with
distribution status superseded
by reporting status.
MARCH 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
53
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