Success of ETFs down to simplicity, transparency, variety and cost – Barclays Stockbrokers

Jul 2nd, 2013 | By | Category: ETF and Index News

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Exchange-traded funds (ETFs) have been around for 20 years. Since the launch of the first ETF on the American Stock Exchange in 1993 (the fund has since transitioned over to the NYSE Arca), they have grown into a $2 trillion-plus market.

Success of ETFs down to ‘simplicity, transparency, variety and cost’, says Barclays Stockbrokers

“Few could have imagined how big the concept [ETFs] would become”, says Chris Stevenson, product manager at Barclays Stockbrokers. (Photo: Barclays, Head Office).

According to Chris Stevenson of Barclays Stockbrokers, the UK’s largest online broker, “few could have imagined how big the concept would become – both as an individual investing opportunity and an investment idea.”

But big they have become. Stevenson points to the astonishing success of the NYSE Arca-listed SPDR S&P 500 ETF (SPY), which has become the most heavily traded equity security in the world with assets of $134 billion, and to the thousands of other ETFs that have been created in the meantime absorbing a record $260 billion in 2012 alone.

The launch of the first ETF on the London Stock Exchange, the iShares FTSE 100 ETF (ISF), came in 2000. Linked to the FTSE 100, this fund has been phenomenally successful too, gathering almost £4 billion in assets. But despite being around for 13 years, the fund continues to enjoy spectacular growth, with assets under management increasing by 164% from January 2009 to May 2013.

Stevenson says the success of ETFs is down to three main factors – simplicity and transparency, cost efficiency, and variety.

“ETFs are typically simple investment structures that do exactly what they are designed to do, and provide investors with absolute transparency of what the components of the investment are. Their simplicity extends to how investors trade them; they act just like shares and can be traded throughout the day at market prices. This is an advantage over traditional open-ended funds, where an investor’s purchase or sale can usually only take place once per day at a set dealing time.

“ETFs can be a cost-effective way to invest in certain themes. Most are passive – designed simply to track the return on a given index rather than beat the market – and therefore come with lower fees than actively managed funds.

“The wide range of ETFs available makes them a flexible way to implement an investment strategy. Investors can change their portfolios dramatically, just by buying and selling a few shares – for example, by switching focus from German equities to French equities, from the technology sector to healthcare, or even from one niche market such as timber to another such as infrastructure. That’s far easier and more cost effective than rebuilding a traditional portfolio, and it enables the investor to take a much more granular approach than would be possible with traditional managed funds.”

Stevenson notes that while ETFs have been around for quite some time, there is still potentially much more growth ahead.

“Although the ETF market has grown significantly in the last two decades, many feel its growth has only just begun. In the US, where ETFs are most widely used, the ETF market still accounts for only around 10 per cent of total assets held in mutual funds (the US blanket term for collective investments). And in Europe and Asia, it is at an even earlier stage of development.

“Barclays Stockbrokers investors have consistently used ETFs as effective and accessible investment vehicles and are increasingly using them to capture short-term market movements, as well as in longer-term portfolio construction. UK-listed ETFs can usually be held within an ISA and investors can consider doing this in order to reduce liability to capital gains tax or income tax.”

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