EXCHANGE TRADED FUNDS – ETFs

Heywood Advisory offers a wide range of low cost best performing Exchange Traded Funds

Exchange traded funds are investment funds traded on stock markets. ETFs hold assets such as shares, commodities or bonds. ETFs most often track an index either a stock market index or bond index. They have become popular because of their low costs, tax efficiency and stocks and shares like features.

ETFs are traded by authorized participants in the larger size transactions and with the retail market using approved brokers.

ETFs started in the USA in 1993 and in Europe in 1999, so they are not a new area of investment but they have increased rapidly in recent years as dissatisfaction with mutual funds has gathered momentum and the advantages of ETFs have been realized.

ETFs in the USA were originally issued as index tracker funds and these are still very popular today. In 2008 the US SEC authorized the issue of actively managed funds, which in essence trade in direct competition with actively managed mutual funds.

Mutual funds have suffered against ETFs and in 2016 the number of mutual funds in circulation reduced by 1.6%. 301 mutual funds closed and returned monies to investors while 97 were merged with other funds. On the other hand ETFs increased by 5.4% in 2016. Some USD 30 billion per month is flowing out of actively managed mutual funds and into passively managed funds, which ETFs have specialized in. Actively managed funds in both mutual funds and ETFs should be carefully looked at since they both carry higher costs than the lower cost index tracker funds. The annual expense cost of the “right” ETFs is 0.15% which demands cost controls by the managements. This cost control is reflected in the cost and gain of an ETF. If the ETF is tracking a bond fund this is most important because of the lower returns from bonds. Equally if the ETF is tracking an equity index the lower the cost the more the ETF will reflect the gain in the index.

Mutual funds charge 1% to 3% per annum because of their need to buy and sell securities for investor purchases and redemptions as well as their marketing, distribution and accounting methods. ETFs do not have the same demands and so can pass on the benefit to the investor with annual cost always less than 1%. ETFs are bought and sold on the market just like a share, can be traded regularly, even on the day, and therefore do not have the same distribution methods as a mutual fund.

EFTs are popular in the USA because of their tax advantages. ETF gains are only taxed on realization, whereas mutual funds are taxed on trading within. In the UK EFTs can be tax efficient if held in an Individual Savings Account or SIPP, Self- invested Pension Plan. Most ETFs are sold from Luxembourg or Ireland, since if they were UK based they would be liable for corporation tax on non-UK dividends. Both Luxembourg and Ireland offer good shareholder protection. ETFs can be held in other planning vehicles such as QROPS.

Heywood Advisory can arrange investments in ETFs in conjunction with our investment banker and client platform.