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ETFs at a glance

  • ETFs are a type of fund that you can trade on the stock market

  • Most ETFs are designed to track the performance of stock market indices

  • The value of ETF shares goes down and up and you can get back less than you invested


Important information

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



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What can I trade in on the Alliance Trust Savings Platform?

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.

view the list of Exchange Traded Funds

How an ETF works

As for investment trusts, OEICs and unit trusts, when you buy a share in an ETF (Exchange Traded Fund) 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.

You can buy and sell ETF shares on the stock market. But in contrast to investment trusts (which are also bought and sold on the stock market) ETFs are ‘open ended’ funds, which means they can issue new shares based on supply and demand.

ETFs have been developed and there are differing innovations such as Physical and Synthetic. Physical replication is where the ETF buys the underlying assets it is designed to track either in full or part. A synthetic ETF is designed to replicate the return of a selected index (e.g. FTSE 100) just like any other ETF. However, instead of holding the underlying securities or assets they mimic the behaviour of the selected index by using derivatives such as swaps.

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 (both capital gains and dividends) in exchange for a stream of cash.


Important information

Investing in these products may expose you to additional risk, for instance you may be at risk if the product's counterparties fail. It's important you understand the specific risks associated with your investment.

Synthetic ETFs can use derivatives which are used to protect against currencies, credit and interests rates move or for investment purposes. There is therefore a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

The Financial Services Compensation Scheme does not cover firms based in the Channel Islands, Isle of Man or in Europe, so ETF/ETCs 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 for each fund will specify where it is based.


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Unfamiliar with some of the terms? Our glossary might help.

go to the glossary

Income from ETFs

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 IDA at a higher price than you bought them for, this counts as a gain for any capital gains tax you might have to pay.

Charges

Look for the 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.


Remember:

  • Be clear on your investment goals and how much risk you are prepared to take.

  • Do your research before deciding to buy.

  • Get advice if you need it.

Find a financial adviser near you

Unbiased


ETFs are popular

The first ETF on the London Stock Exchange started trading in 2011.


Today around 800 are listed and in April 2015 alone there were over 250,000 trades in ETF shares.


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Track down a return

Investing through ETFs can give you a cheap, easy and quick way to capture the returns from a range of different asset classes including bonds, shares and commodities.

Read the article

The price of ETFs

The price of ETFs can change through the day, both as the underlying index changes and based on supply and demand.

 

Be clear on the risks

Use our investment selector to research the index your ETF invests in. Some are riskier than others. If the index falls or rises your ETF will do the same.

Some ETFs can be illiquid making them hard to dispose of as their prices can change rapidly when the mood of the market turns.


Extensive investment choice.

Browse investments

Our Investment Selector is powered by Morningstar, a leading provider of investment research. Use it to:

  • Check what you can access through your Account (over 4,000 investments to choose from)

  • Find out about the risks and charges for each investment (which are on top of the charges you pay us for your Account)

  • Review past performance for investments although remember that past performance is not a guide to future performance

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.