INDEX INVESTING EXCHANGE-TRADED PRODUCTS
“
It needs to be
made clear whether
or not an ETF has
distribution/reporting
status or is likely to
receive such status
shortly from the
Inland Revenue, or
investors might face
a 50% rather than
18% tax bill when
selling the EFT
”
to 300% daily upside
performance, while
inverse ETFs provide
one or two times daily
short index performance.
These types of
ETF have been around
since 2005 and are used
to magnify returns,
hedge portfolios and
manage risk, but should
be used with caution. In
my view they are only
useful over a very shortterm
period since not
only are the fees much
higher than normal, they
also have the extra costs
of rebalancing daily.
They rarely deliver the
inverse of the underlying
index over the
medium to long term.
� Low cost or higher cost:
Total expenses (net of
any stock-lending
income), tracking error,
fund size, and bid-offer
spreads warrant particularly
close examination.
Often while much smaller
than the bid-offer
spread of most shares,
corporate bonds, or
mutual fund; the bidoffer
spread can vary
markedly and in some
cases account for two or
three times of the reported
expenses of the ETF.
Many providers show
the average bid-offer
spreads for their products
and this needs to be
monitored closely by
investors and advisers.
l Tax treatment
In the UK, the tax treatment
of ETFs varies widely. Prior
to December 2009, an ETF
would have been classified
with distribution status or
non-distribution status.
With distribution status,
any gains made on the disposal
of the ETFs would be
regarded as a capital gain
for UK individuals (with
the current rate of capital
gains tax at 18%) as
opposed to income tax,
making ETFs with this
status tax efficient.
Distribution status has now
been superseded by reporting
status which in theory
means that there will be a
greater number of ETFs
able to benefit from the tax
efficient reporting status.
This is obviously a positive
and important factor for
Transparency.
European ETF and ETP growth
0
'00 '01 '02 '03 '04 '05
Source: BlackRock, Bloomberg
retail investors, but tax
implications can vary and
so appropriate advice must
always be sought.
It needs to be made
clear whether or not an
ETF has distribution/reporting
status or is likely to
receive such status shortly
from the Inland Revenue,
or investors might face a
50% rather than 18% tax
bill when selling the EFT.
In conclusion, my view
is that the most important
debate should be ensuring
exchange-traded products
are clearly categorised so
investors know exactly
what they are buying. With
56 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
Assets $Bn
250
200
150
100
50
ETF commodity assets
ETF fixed income assets
ETF equity assets
ETP assets
ETFs
ETPs
'06
'07
'08
'09
'10
1000
800
600
400
200
increased choice comes
increased risk, and nowhere
is there more choice than
in the field of ETFs.
As with choosing a traditional
mutual fund, picking
an ETF requires research
and analysis, and while the
analysis is more quantitative
than qualitative, therefore
more objective, it is
still reasonably complicated
and not as obvious as one
might first think.
At SCM Private we only
invest clients’ portfolios
(unlike many other fund
managers) in ETFs as we
believe these offer investors
the greatest security.
We believe our investors should understand exactly what
they’re paying for. Which is why we are completely transparent
with charges. Take our approach to Stamp Duty Reserve Tax
(SDRT) – which is payable when UK stocks are bought.
Often this 0.5% charge isn’t highlighted, whereas we make
it plain. We also ask investors to pay SDRT upfront – so they
know the exact cost to their investment from the outset. We
think this is not only clearer, but fairer too.
Transparency. It’s the Vanguard Way. ™
0800 917 5508 vanguard.co.uk
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persons resident in, the UK. Vanguard Investments UK, Limited only gives information on products and services and does not give investment advice based on individual circumstances. The value of investments,
and the income from them, may fall or rise and investors may get back less than they invested. Issued by Vanguard Investments UK, Limited which is authorised and regulated in the UK by the Financial Services
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