Invest in funds traded on stock exchanges
ETFs are a type of fund that you can trade on the stock market. They are pooled investments like investment trusts, OEICs and unit trusts, so when you buy a share in an Exchange Traded Fund (ETF), you’re putting your money together with others to invest in the shares of other companies and assets.
ETFs usually invest in a way that tracks the performance of a market index. That could be any index in any type of asset from anywhere in the world.
ETFs can be physical or synthetic. Physical ETFs buy the underlying assets in the index they are designed to track, either in full or part. Synthetic ETFs, instead of holding those underlying assets, use derivatives, such as total return swaps, to mimic their behavior. With a total return swap a contract is struck with a financial partner (known as a counterparty) to pay the ETF the precise return of its chosen index (return includes both capital gains and dividends) in exchange for a stream of cash.
A total return swap is a financial derivative. In the case of a synthetic ETF, it’s a contract struck with a financial partner (known as a counterparty) to pay the ETF the precise return of its chosen index (return includes both capital gains and dividends) in exchange for a stream of cash.
Please remember the value of your
investments and any income from
them can go down as well as up and
you may get back less than the
amount you originally invested.
All investments carry an element of risk which may differ significantly. If you are unsure as to the suitability of any particular investment or product, you should seek professional financial advice.
Investing in these products may expose you to additional risk, for instance you may be at risk if the counterparties in a synthetic ETF fail to complete on transactions, or if a synthetic ETF experiences losses on its derivative positions.
The Financial Services Compensation Scheme does not cover firms based in the Channel Islands, Isle of Man or in Europe, so ETFs based there cannot benefit from the protection offered by the FSCS if a firm or fund should be unable to pay its liabilities. The Key Investor Information Document (KIID)/Key Information Document (KID) for each fund will specify where it is based.
To view the list of all the Exchange Traded Funds available on the Alliance Trust Savings platform read our List of Exchange Traded Funds. For ISA Accounts please remember there are a few restrictions.
Like other shares, ETFs can pay you income in the form of a dividend. For ETFs that track an index this is usually based on the income the ETF gets from its underlying investments. Dividends aren’t usually guaranteed.
The other way to generate income from ETF shares is to sell them. If you sell ETF shares in an Investment Dealing Account at a higher price than you bought them for, this counts as a gain for any Capital Gains Tax you might have to pay.
Look for the Total Expense Ratio or Ongoing Charge on Investment Selector for the ETF you are interested in. This is how much you pay to the manager of the ETF each year for looking after your investment, and paying costs like directors’ fees and audit fees.
ETFs that just track market indices often have a lower Ongoing Charge than more actively managed funds and investment trusts.
Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.