Funds that have revolutionised investments

Traditional financial products such as stocks and bonds have long been popular investment choices for professional and private investors - since the turn of the seventeenth century, people have bought and sold shares on London Stock Exchange.

But investors are always looking at more innovative ways to allocate their capital and over the past two decades this has spurred the dramatic rise of new alternative investment products such as Exchange Traded Funds or ETFs.

Put simply, ETFs are index tracking funds that are listed and traded on a stock exchange, much like stocks. ETFs provide exposure, in one single order, to a wide range of asset classes and markets. First introduced in the UK in 2000, there are now over 1,000 ETFs and Exchange Traded Commodities listed on London Stock Exchange and London has become a leading global trading venue for these products.

Sign up to our Business newsletter

Sign up to our Business newsletter

This exceptional growth has been fuelled by the appeal of ETFs’ combination of instant diversification with the simplicity and tradability of shares. There are now ETFs tracking hundreds of indexes from developed and emerging market equities, to fixed income and commodities. For example, London Stock Exchange became the first European exchange to offer ETFs with direct exposure to Chinese A-share equities last year – shares that were traditionally reserved for mainland Chinese investors only.

And it’s not just well known indexes such as the FTSE 100, which includes the 100 largest companies listed on London Stock Exchange weighted by market capitalisation, that are tracked by ETFs. Index providers are increasingly moving away from market cap weighted indexes towards alternative strategies, looking at volatility and dividend strategies.

And one idea post Brexit that is gaining traction is the analysis of a company’s revenue growth between its domestic and overseas business. This is allowing more accurate assessment of what countries and regions investors’ portfolios are exposed to, in turn allowing a number of ETFs to also track this exposure.

But as with all investments, it’s important to take the time to understand the structure and mechanics of the product. ETFs are not capital protected and investors should be aware, as with all investments, losses up to the total capital invested can occur.

Because ETFs are listed on stock exchanges, their prices are simple to find and understand.

Investors can monitor the real time value of an ETF and can trade in or out of it throughout the market day. Investors can gain exposure to literally hundreds of securities through a single transaction, allowing them to tap markets they otherwise wouldn’t be able to access. What’s more, this diversification seeks to reduce concertation risk by spreading an investor’s capital across a larger portfolio of stocks.

The cost advantage can also be significant compared to other financial products. Since ETFs are mostly passive investment funds, aiming to generate similar returns to the indexes they hold, not actively outperform them, they have much lower management fees than mutual or active funds. They also have significant tax advantages, being eligible for inclusion in ISAs and SIPPs and attract no stamp duty.

ETFs have revolutionised investment. Since their introduction only two decades ago, the industry has grown at a phenomenal pace and ETFs now hold over $3.3trillion of assets globally.

If you’d like to find out more about ETFs, London Stock Exchange has a dedicated online resource as well as a full database of all the ETFs available on its markets. Visit: www.lseg.com/etfs