Conclusion
Not all ETFs are the same. We advice that novices should opt for funds that track indices they understand, such as the S&P500, FTSE100 or MSCI Emerging Market index. Gold ETFs are also useful for investors looking for a safe haven.
But be aware of so-called leveraged ETFs. These offer the potential to make extra gains - for example, a 1pc rise in an index translating into a 2pc rise in the value of the ETF. However, if the markets fall you will lose 2pc for every 1pc fall. The worst performer over the past year, according to Money Management, was ETF Securities' Leveraged Nickel, which fell by 90pc.
It's advisable to understand what the ETF is aiming to replicate - some give the impression they are tracking an index of 800 stocks, yet the reality is quite different and they could be tracking only a selection of stocks that make up the index.
"Investors new to ETFs should keep it simple - indeed one of the problems with a growing industry is that it gets more and more complicated."
Participants on the ETF platform should note that as with any financial product there is the need to understand what you are investing in. Nothing is risk-free - not even government bonds - so you need to look under the bonnet of the fund.
Most ETFs have a trustee structure and are 'bankruptcy remote' but others will have counterparty risks.
Some lessons learnt are that some ETFs use derivatives so there will be counterparty risks attached; some funds lend portfolios to hedge funds so there could be problems if the hedge fund goes under. If you are not sure, get advice."
Enthusiasts describe ETFs as a cheap way to get exposure to equity markets. They do not levy front-end charges, early redemption penalties or exit charges, and service charges are often low.
While unit trusts are priced daily, shares in ETFs are traded like single shares, so the prices move throughout the day. They therefore offer an efficient way of achieving immediate exposure to an index or sector as it rises and falls in value.
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