/ ETFs /
More esoteric instruments are available , such as leveraged products or short exposure ETFs , but many people will find these a little racy . As with any investment , the most important thing is to ensure you fully understand what you are investing in and if you don ’ t , you probably shouldn ’ t do it .
KNOWLEDGE IS POWER Thankfully , information is abundant in the ETF market , but some areas on the fringes may include instruments less suitable for long term investors . As a result , Mellor says you should ask yourself three questions of every holding .
● Does it offer the exposure to the market , sector or theme you want ?
● How easily can you get in or out ?
● What are the true costs of investing ?
Although ETFs are considered low cost , they occasionally feature charges that are not immediately apparent , so it is important to look beyond the headline figure .
“ Check how well the ETF has tracked its index , as any performance drag will undo the benefit of a lower ongoing charge ,” said Lynn Hutchinson , assistant director at Charles Stanley .
If the ETF doesn ’ t hold physical assets but uses derivatives , this can have implications for performance . “ Fees applied on synthetic ETFs may not be shown in the total expense ratio / ongoing charges , as not all providers publish this ,” Hutchinson added .
Size matters , too , making it important to check how concentrated or wellresourced the fund is
Even some physically replicated ETFs don ’ t hold all the underlying stocks , due to illiquidity or availability , and performance will therefore deviate from that of the index .
Hutchinson says size matters , too , making it important to check how concentrated or well-resourced the fund is . Does it have a number of authorised participants , are there sufficient assets under management and how liquid are assets ? Although
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ETFs trade throughout the day , if one you hold experiences high redemptions , will you end up getting trapped ?
FINDING OPPORTUNITIES One of the major benefits of ETFs is that they have allowed individual investors to replicate the kind of strategies only available to their institutional counterparts in the past , says Allan Lane , managing partner of Twenty20 Investments .
There are numerous opportunities available in emerging market equities – Indonesia has been one of Lane ’ s favourites for some time , with the Philippines , Thailand , Taiwan and South Korea also performing strongly .
Brazil has had a tough time and still has political problems to work through , but appears to be bouncing back if you ’ re looking for single-country equity exposure .
Lane adds that quantitative easing has changed the fixed income arena , leaving bonds
PERFORMANCE OF ETFs OVER 3YRS
SSGA - SPDR S & P Biotech ( 64.46 %)
Harvest - MSCI China A Index ETF RMB ( 50.16 %)
iShares - STOXX Europe 600 Media UCITS ETF ( DE ) ( 38.96 %)
iShares - Global High Yield Corporate Bond ( 9.93 %)
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