Investor Guide to ETFs

Transcription

1 Investor Guide to ETFs

2 Join the investment revolution

3 Exchange Traded Funds (ETFs) can help change the way you manage your investments. ETFs combine the benefits of investment funds and shares, offering you diversified, efficient, cost-effective and transparent access to the world s investment markets. Institutional investors such as pension funds, government agencies and private banks have been using ETFs for many years. Now, individual investors like you are able to access the same investment opportunities as these sophisticated and demanding investors same fund, same costs, same performance. This Investor Guide to ETFs has been designed to help you discover more about the benefits of using ETFs and how they can form a key part of your investment portfolio. The guide also explains the benefits of partnering with ishares for your ETF investments, based on our core strengths of professional quality, individual choice and responsible innovation. 1

4 What is an ETF? An ETF is an investment fund that is traded on a stock exchange. The aim of an ETF is to track the performance of a specified index (like the FTSE ) and to provide you with the same return as that index, less fees. Like a fund, your ETF investment gives you access to a portfolio of companies (shares), bonds or other asset types (such as commodities or property). Like a share, an ETF is bought and sold on a stock exchange. Consequently, ETFs offer you the best of both worlds the diversification of an investment fund, with the easy tradability of a share. Like all investments, your capital and income is at risk. The liquidity of the products is not guaranteed. MUTUAL FUND EXCHANGE TRADED FUND (ishares) SHARE 1 The FTSE 100 Index offers exposure to the 100 largest UK listed companies. 2

5 Are ETFs popular? Yes. Since the launch of the first ETF back in 1993, the growth of the ETF industry has been phenomenal, as you can see from the chart. Globally, there is now around $2.6 trillion 2 invested in ETFs. Within Europe, the popularity of ETFs has soared over the past five years, with around $464 billion 2 invested in ETFs today. Pension funds, government agencies and private banks have been investing in ETFs for many years. Now, ETFs are becoming increasingly popular with private investors, keen to take advantage of the many benefits offered by this cost-effective and flexible investment solution. Assets US$ Bn 3,000 2,500 2,000 1,500 1, Number of ETPs 6,000 5,000 4,000 3,000 2,000 1, Jul-14 ETFs offer you the best of both worlds. Assets US$ Bn Number of ETPs Source: BlackRock ETP Landscape, Bloomberg, Strategic Insight Simfund, as at end of July BlackRock ETP Landscape, Bloomberg, Strategic Insight Simfund, as at end of July

6 Are all ETFs the same? No. Broadly speaking, there are two types of ETFs and the difference between them relates to what the ETF actually owns. PHYSICALLY-REPLICATING 3 ETF Physically-replicating ETFs hold the securities of the index that is being tracked, providing the investor with the security of actually owning the securities. There are two tracking techniques: full replication, where all the constituents are held in the weighting defined by the index or an optimised approach where not all the index constituents of a large index are held, as full replication could be less efficient and costly. DERIVATIVE-REPLICATING ETF A derivative-replicating ETF holds a Financial Derivative Instrument (FDI), usually a so-called performance swap. Under such contract the ETF receives from a counterparty a payout which is equal to the index return the ETF is replicating, minus a fee (the swap spread ). Typically, derivative-replicating ETFs are riskier than physically-replicating ETFs, because of their exposure to the swap counterparty. That said, derivativereplicating ETFs can be a good way of gaining exposure to markets that cannot be accessed through physicallyreplicating funds, such as commodities and some hard-toaccess emerging market countries. Over recent years, a number of ETF providers have begun moving to a physicallyreplicating model, reinforcing a view that ishares has held since inception; namely on balance, physicallyreplicating ETFs generally provide you with a more robust investment solution. This view is attributed to the high level of transparency and low complexity of physicallyreplicating ETFs. Indeed, almost 100% of currently offered ishares ETFs 4 are physically-replicated. 3 There are two main types of ETF structures physical-based and swap-based. In order to replicate their index performance, physical based ETFs use the cash markets to buy either all or a sample of the securities within the underlying index. 4 Please note: 100% of our UK registered funds are physical as of 31 July BlackRock Investment Institute ETP Research, Bloomberg, 31 July

7 ishares ETFs seek to track a benchmark and holdings are not altered during rising or falling markets. Some ishares ETFs are optimised and therefore may not hold all securities within the benchmark index. Performance may differ from the underlying benchmark index. ishares ETFs trade on exchanges intraday at the current market price which may differ from net asset value. Transaction or brokerage fees will apply. Liquidity is not guaranteed. Efficiency and access ETFs are traded on stock exchanges, so you can easily make or add to an investment, or sell your investment. It s as easy to get out as it is to get in. Transparency ETFs give you greater control of your investments and you know exactly what you re investing in. With ETFs, you have daily visibility as to what securities the fund holds, how it s performing and costs. What are the benefits of ETFs? Cost effectiveness ETFs often have lower costs than other types of investment funds. Diversification ETFs give you access to a whole world of investment options, covering a broad range of asset classes, sectors and geographies. This can help to spread risk and avoids putting all your eggs in one basket.

8 Diversification essentially means don t put all your eggs in one basket. If you can spread your investments over a number of different asset classes (shares, bonds, property etc.), you provide greater opportunity to achieve more consistent returns, often with a lower level of risk. A B EXPECTED RETURN PORTFOLIO A CONCENTRATED* EXPECTED RISK 14% 7% PORTFOLIO B DIVERSIFIED* 9% 6% EXPECTED RISK EXPECTED RETURN No. of Shares 4 No. of Shares 45 * % per annum. For illustrative purposes only. Past performance is not a guide to future performance and may not be repeated.

9 Diversification UNDERSTANDING RISK AND RETURN In the past, many investors concentrated solely on the return on their investment i.e. whether they made a profit or a loss. However, there is a growing acceptance that you should concentrate on both return and risk i.e. whether or not the investment has provided you with the actual return you expected when you first invested, and to what degree your initial investment (your capital) has been subjected to the chance of losing money. With this in mind, the aim of your investment should be to obtain the highest return on your investment, for the lowest risk. Diversification can help you reach this optimum balance of risk and return, as it spreads your investments over a wider range of asset types, countries and sectors. The theory behind this is that at different points in time, different asset types (or countries, or sectors) will perform differently if you have exposure to a broad range, then over a period of time the poor performance experienced in one type of asset will be compensated for by stronger performance in another, and vice versa. This lowers the risk for negative overall performance at any one point in time. Let s consider the example above. The diversified portfolio B targets a similar level of return to portfolio A, but importantly it does this with considerably lower risk, potentially making it a more attractive investment. This is shown in the diagram opposite. With ETFs, this example can be expanded upon. As we explained previously, physically-replicated ETFs hold the underlying securities (like shares or bonds) listed in the index that they track. This means that ETFs are by their nature already highly diversified and consequently can offer you an attractive risk/return balance 5. Moreover, ETFs are available across different asset classes and geographies, which we will now explain further. Don t put all your eggs in one basket. 5 ishares ETFs seek to track a benchmark and holdings are not altered during rising or falling markets. Some ishares ETFs are optimised and therefore may not hold all securities within the benchmark index. Performance may differ from the underlying benchmark index. ishares ETFs trade on exchanges intraday at the current market price which may differ from net asset value. Transaction or brokerage fees will apply. Liquidity is not guaranteed. 7

10 Efficiency and access As we said earlier, ETFs are as easy to trade as a share. This means that you can easily make or add to an investment, or sell your investment. In addition to being an efficient way of investing, ETFs also give you greater access to investment opportunities across different asset types and regions. So, whatever your investment goals, there is an ETF that can help you achieve them. ishares offers over 140 ETFs in the UK alone. We believe these ETFs represent ideal building blocks for use within your portfolio, giving you access to a wide range of asset classes and markets worldwide. You can invest in ETFs that track equity indices, bond indices, commodity indices and property indices. There are literally hundreds of ETFs available which cover virtually all major asset classes. ETFs are available for domestic and global investments, or country and regional investments. ETFs cover most sectors too from technology to telecommunication companies, clean energy to consumer stocks. You can invest in bonds issued by governments and companies, both in developed and in emerging markets. 8

11 If your investment goals change, then the flexibility of buying and selling ETFs on exchange means you can easily change your ETF investment according to your needs.

12 At ishares, we understand the importance of keeping your investment costs under control. Cost-effectiveness Investment products can sometimes charge high management fees and other costs. These costs can cancel out any gains made by your investment and can sometimes even lead to losses. That is why ETFs have one primary cost element the Total Expense Ratio (TER). The TER represents the total cost to you of holding your ETF investment for one year. The TER covers all annual costs relating to fund management. The average TER is usually higher than that of traditional passive funds. One of the reasons for the higher TER is that ETFs can be traded throughout the day, while traditional passive funds trade only once a day. The intra-day trading mechanism comes at a cost partly because the ETF provider needs to pay a listing fee to the stock exchange where the ETF is made available to clients. ishares and BlackRock have been strong advocates of the Total Cost of Ownership (TCO) of investment instruments. The TCO argument looks beyond TER, including other costs related to entering, holding and exiting a specific investment. Active and index tracking mutual funds can usually be accessed at a single valuation point each business day at the net asset value adjusted for applicable dealing charges and fees. 10

13 The TCO is calculated by adding all the costs of an ETF and subtracting all the revenues generated over the same time period. It considers external factors such as the explicit costs of trading, and internal factors such as rebalancing costs 6 and securities lending 7 revenue (see figure below). INTERNAL FACTORS Physical-replicating funds Total Expense Ratio (TER) Rebalancing costs Securities lending revenue Derivative-replicating funds Total Expense Ratio (TER) Swap spread Securities lending revenue EXTERNAL FACTORS Trading spreads + = Creation/redemption costs Brokerage fees Tax TOTAL COST OF OWNERSHIP Source: BlackRock. TOTAL COST OF OWNERSHIP: INTERNAL AND EXTERNAL FACTORS Internal factors include both costs to the fund and revenues received by the fund for the same time period. These internal factors include TER, rebalancing costs, withholding tax differentials and any securities lending revenue generated. External factors are costs to the investor deducted at the time of purchase and sale of an ETF and include trading or creation/ redemption costs along with brokerage fees and taxes. Trading costs are reflected in the bid/ask spread when buying an ETF on-exchange or over-the-counter 8. When a comparison between ETFs and traditional passive funds is performed based on the TCO, as opposed to the TER, the costs of the two types of instruments becomes much more comparable. Usually, the choice of one or the other is a function of the investment horizon of the client. 6 Adjusting the deviation in the portfolio weights back to the intended weights due to the movement in underlying asset prices. 7 Securities Lending is a well-established practice in financial markets where investors such as mutual funds, ETFs, pension funds and insurance companies make short-term loans of their securities in order to generate incremental returns for their portfolios. Source: 8 Trading done directly between two parties without the supervision of an exchange. 11

14 Transparency With many types of investment, there can sometimes be a lack of clarity as to where your money is actually invested. There can also be considerable uncertainty as to whether or not your investment is meeting its targets, as there is little information on how it is performing day-to-day. At ishares, we believe in transparency. That is why we publish daily on our website and for the majority of our funds, a thorough disclosure of holdings and structures. For example, for physically-replicated ETFs, we publish the list of all the securities held by the fund. We also explicitly show the funds participating in securities lending as well as all relevant lending parameters (revenue to the fund, level of the collateralisation, collateral holdings, etc.) We also publish full performance information, so you can see exactly how your investment is performing on a daily basis. What are the risks with ETFs? It s important to understand that ETFs are not guaranteed products just like any investment in the stock or bond market, your initial investment is subject to loss. As there are many different types of ETFs, there are some that are riskier than others. If you invest in an ETF that holds securities in a currency other than your own (for example, a Japanese equity ETF), your returns can also be affected by movements in the exchange rate (GBP vs. JPY). There are some ETFs that provide currency hedging to minimise this currency risk. ETFs are designed to track an index i.e. they buy the same securities as that index and attempt to replicate the returns, minus the cost (fee) of the fund. There is a risk that there can be a divergence between the return of the index, and the return of the fund. However, it should be remembered that it is impossible for any investor to invest directly in an index. 12

15 All of this information is easily accessible online at our website

16 Why choose ishares ETFs? ishares has been entrusted with more assets from more investors than any other ETF manager in the world. We launched our first ETF in Europe in April and today manage over 47% of all European ETF assets. With over 140 ETFs listed on the London Stock Exchange, we offer an unparalleled range of funds for our clients, and their management is backed by the expertise of 135 investment teams across 30 countries. We believe our success is based on three core strengths: PROFESSIONAL QUALITY ishares delivers quality products that can help you navigate today s volatile markets. INDIVIDUAL CHOICE As your partner, ishares helps you execute investment ideas with insights and support. RESPONSIBLE INNOVATION ishares is an industry leader in making investing clear, fair, and efficient for you. 9 Source: BlackRock, 31 July

17 ishares range of ETFs ishares manages a range of ETFs registered in the UK, helping investors to express their unique investment viewpoint with a broad range of options. Please visit our website ishares.co.uk for the up to date list of funds. How do I buy ishares ETFs? As with all investment decisions, ishares recommends you: SEEK independent professional advice before investing. Your financial adviser will be able to buy and sell ETFs on your behalf via a broker or their investment platform. Your adviser will be able to explain how to set limits on the purchase and sale prices that transactions are completed at. Please remember that as with all investments there are risks involved with buying and selling ETFs. Your investment can go up and down and your capital is at risk. How do I find out more? As always, we recommend you speak directly to your financial adviser to create an investment strategy customised to your long-term financial objectives. We have an extensive educational section which explains more about the characteristics of ETFs and how ETFs can help you achieve your investment goals. We also provide detailed product information on our range of ishares ETFs. This includes fund data and fund factsheets. Our website, contains a wealth of information to help you find out more about ETFs. ASSESS your investment objectives and choose investments that will help you meet these goals. SPEND TIME understanding your investment and read all relevant ETF prospectuses before investing. 15

18 Every investor is unique. That s why there s ishares.

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20 Want to know more? +44 (0) ishares.co.uk Regulatory Information BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority ( FCA ), registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0) For your protection, calls are usually recorded. ishares plc, ishares II plc, ishares III plc, ishares IV plc, ishares V plc, ishares VI plc and ishares VII plc (together the Companies ) are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Central Bank of Ireland. For investors in the UK Most of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme on its default. The Companies are recognised schemes for the purposes of the Financial Services and Markets Act Any decision to invest must be based solely on the information contained in the Company s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus. Restricted Investors This document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan. Risk Warnings Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change. BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information, investment should be made on the basis of the relevant Prospectus which is available from your Broker, Financial Adviser or BlackRock Advisors (UK) Limited. We recommend you seek independent professional advice prior to investing. In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from the manager BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ALADDIN, ishares, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners a-IS-IGTE-R-JUL15-EN