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Exchange Traded Funds - low cost and diversified access to a huge range of alternatives Back  
Exchange-traded funds (ETFs), the securities that track an index, a commodity or a basket of assets like an index fund, but trade like a stock on an exchange as a number of organisations are still flocking to the investment format. ETFs offer low costs, transparency, liquidity, and tax efficiency.

ETFs offer investors access, with the benefits of liquidity and low costs, to a diverse range of investment options. In the recently published Lipper Pan-European ETF Report: 2007 Review report says ‘ it is no surprise that investors are looking for exchange-traded funds specializing in investing in specific asset classes industries, regions, commodities, or strategies that will buck that trend in thew general markets.’

The growth in popularity of ETFs in the European exchanges is highlighted in the Lipper Pan-European ETF Report: 2007 Review, where the growth rate in the European exchanges selected by the report had a turnover of 51.5 per cent.

They allow investors to invest in listed ‘funds’ and thereby reduce exposure to the risks associated with trading single shares while offering straightforward access to the performance of key indices and sectors.

ETFs’ daily continuous pricing mirrors the share price performance of underlying investments, and offer flexibility in the timing of purchases and sales and availability online and with stock-market settlement systems.

Cost incentives also attract investors to ETFs. There is no stamp duty to pay on an ETF, as the fund manager has already paid duty when buying the underlying shares - there is also no additional charges for the individual shareholder; and low annual management costs compared to other pooled investment vehicles, as the costs are built into the fund pricing.

Investors who cannot access hedge fund minimum investment requirements can invest in some ETFs that use hedge fund strategies, such as the Schwab Hedged Equity Fund or the TFS Market Neutral Fund.

Irish investors can access ETFs through stockbrokers, with the big four firms all offering ETF investment opportunities. The ISEQ 20 ETF is the first ever Irish ETF which is managed by Bank of Ireland Asset Management, and tracks 20 leading Irish quoted companies, it can be traded through any Irish stockbroking firm. Investors can also access any number of international ETFs through the stockbrokers. Alternatively investors can access ETFs through wealth managers such as Barclays Global Investors, “I Shares” ETF product, which has a 43 p.c market share in Europe, ahead of Lyxor, 22 p.c, and Deutsche 9 p.c. (end 2007 figures from Lipper).

There is no minimum investment for trading in an ETF, although there is a minimum investment with stockbroking firms to open an account. For example, NCB will trade any amount on an ETF, but require a minimum investment of E20,000 to open an account.

When buying or selling an ETF, your stockbroker will generally quote prices based on the value of the shares, plus their commission and any trading fee.

ETFs have been existence since 1993 when they were first made available by the Toronto Stock Exchange.

The exchange-traded note(ETN) a similar product to the ETF is now also available to Irish investors. These securities consist of senior unsecured debt linked to a specific market index or return stream. There are now more than two dozen ETNs in the market, and most of them have been launched in the past year.

ETNs involve an underwriting bank that commits to pay whatever a certain investment returns. Unlike ETFs, these investment vehicles do not usually pay interest or dividends before maturity.

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