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Knowledge centre

Here we seek to address some frequently asked questions about ETFs and other exchange traded investments.

If you're unable to find what you're looking for, please do not hesitate to phone us on 0117 900 9000 or email us.


  • What are Exchange Traded Products (ETPs)?

    ETP is the collective term used when describing Exchange Traded Funds, Exchange Traded Commodities, Exchange Traded Currencies and Exchange Traded Notes.

  • What are Exchange Traded Funds (ETFs)?

    ETFs are funds traded on a stock exchange and are a type of ETP. Most ETFs aim to track the performance of a particular index of stocks, bonds or other assets and often have low management costs.

  • What are Exchange Traded Commodities/Currencies (ETCs)?

    ETCs enable investors to track an individual, or collection of, commodities or currencies. ETCs follow the price of metals, oil, agricultural products or exchange rates either directly, or by tracking an index of derivatives.

  • What are Exchange Traded Notes (ETNs)?

    ETNs are a type of ETP often issued by an investment bank or investment management company. ETNs are often used to track assets or indices that other ETPs cannot. The investment manager promises to give the same return as an index, less charges. Some ETNs hold collateral - stocks, bonds or cash unrelated to the index but of equal value - whereas many do not. ETNs are complex investments and most are generally only suitable for sophisticated investors.

  • What is an index?

    An index represents the performance of a set of investments. For example, the FTSE 100 is an index containing the largest 100 companies listed on the UK stock market. Most major markets have indices that can be used to track their performance, for example the S&P500 in the US. Normally these indices are run by an independent company who define which investments are included and what proportion of the index each represents. Often the biggest, most widely traded companies are the biggest holdings in the index.

  • What do ETFs, ETNs and ETCs invest in?

    There are over 1,500 ETFs, ETNs and ETCs available on Vantage, tracking shares and bonds, to commodities, currencies and agricultural produce. You can see the range of ETPs available by using our search tool.

  • What is Smart Beta?

    Most indices follow the price of stocks or bonds and are constructed so that the biggest, most widely traded companies are the biggest holdings in the index. However some indices are available which take into account other factors, like dividend yield, company earnings or the volatility in the investment price. These are often called smart beta, factor indices or alternatively weighted indices.

  • Do ETFs pay a dividend?

    ETFs are normally set up as either income or accumulation. Income ETFs pay out dividends to holders as cash. Accumulation ETFs do not pay a dividend. The income is reinvested causing the price of the ETF to increase.

  • How do I search for ETPs?

    We have created a search tool to allow investors to locate the ETPs of their choice. You can search by ETP provider, sector or name.

  • How do ETFs replicate the index?

    Fully replicated ETFs hold every investment, in proportion, within the index they are looking to track. For example, a fully replicated S&P 500 ETF would hold all 500 companies in the index.

    Partially replicated ETFs do not hold every investment in the index, instead the manager chooses a portfolio designed to perform in line with the index, without holding every stock or bond. This process is called "optimisation" for shares and "sampling" for bonds.

    Finally, swap-based ETFs do not hold the assets within the index they are looking to track. Instead, the ETP will buy a swap (a type of derivative) usually from an investment bank who agrees to match the return of the index. They also hold collateral - stocks, bonds or cash unrelated to the index but of equal value to the ETF. This would be used to compensate the ETF if the swap provider were to run into financial difficulties.

  • How do commodity ETCs work?

    Some commodity tracking ETCs are physically replicated, meaning that they buy and store the commodity in vaults or warehouses. This is most common in precious metals like gold or silver. However, in some cases holding the underlying physical commodities would be extremely difficult. Wheat, for example, would spoil if held for any length of time, and the cost of storing millions of barrels of oil would be prohibitive. Therefore, rather than taking delivery of the physical commodities, and tracking the price directly, some ETCs use the futures market to gain exposure to movements in the price. Please note however, the use of futures is not confined to commodities which are difficult to store. Each ETC's prospectus offers details. You can access most prospectuses on the 'at a glance tab' of the ETP you're interested in on our website. Futures-based commodity ETCs are complex investments and most are generally only suitable for sophisticated investors.

  • How do currency ETCs work?

    Most currency ETCs follow a currency index by using a type of derivative called a futures contract to track an exchange rate. The ETC enters into an agreement to exchange a certain amount of currency at a fixed rate at a time in the future. If the exchange rate increases in the interim, the value of the derivative does too. Futures-based currency ETCs are complex investments and most are generally only suitable for sophisticated investors.

  • What is currency hedging

    Currency-hedged ETPs use derivatives to try and minimise the effect of exchange rate fluctuations on an ETP. This can protect or harm the performance of an ETP depending on currency movements. Currency hedging normally comes with an additional cost.

  • What does 'leveraged' mean?

    Leveraged products aim to return a multiple of the index they return. For example a 200% leveraged ETP aims to return double the performance of an index. Leveraged ETPs are normally intended to be held for a short period of time, often less than 24 hours. Over the longer term, leveraged returns can vary significantly from the index. Leveraged ETPs are complex investments and most are generally only suitable for sophisticated investors.

  • What is stock lending?

    Many ETFs lend the stock it holds to a third party in exchange for a fee which can help to offset some of the fund's management charges, reducing costs. All physical ETFs are permitted to lend stock, though not all currently do. Swap-based ETFs and ETCs generally do not lend stock. At all times the fund remains the beneficial owner of the shares, is entitled to all dividends and has the right to recall the stock at any stage. The ETF is normally given collateral (often cash or a different stock) to hold whist the stock is on loan, but there is a chance that the ETP could lose money if the loan can't be recovered. While the risk is very low, cautious investors might prefer to invest in ETPs which do not lend stock.

  • How often can I buy or sell ETPs - is there a minimum holding period?

    There is no minimum holding period when investing in ETPs. You can buy and sell at any time within normal market hours. Please note there are costs associated with buying and selling ETPs - you pay stockbroking commission every time you deal and there is a difference between the buy and sell price - called the spread.

  • Can I buy all ETPs through Hargreaves Lansdown?

    Many ETPs are complex and perhaps risky, therefore EU regulations restrict who can invest in them. You will need to complete a form before investing which if you are a knowledgeable investor will not be difficult.

    You can buy the vast majority of ETPs on the London Stock Exchange. You can also access European and American ETPs. You can see the range of ETPs available by using our search tool. Please note if you are interesting in an ETP not showing on our website, please call our Dealing desk on 0117 980 9800 and we will attempt to purchase the ETP on your behalf.

  • Can I hold ETPs in my ISA or SIPP?

    Most UK ETPs can be bought and held within an ISA or SIPP. To see if an particular ETP can be bought or held with an ISA or SIPP please view the ETP factsheet.

  • What is the indicative spread?

    Spread is the difference between the buy and sell price of an investment. The spread is different for every ETP and can be influenced by a number of factors. The indicative spread is an estimate of the spread shown on each ETP's factsheet, based on most recent buy and sell prices available.

  • What factors affect the spread?

    One of the most important factors is the investment or index that an ETP follows - spreads tend to be higher if these are smaller or less frequently traded. Larger, more frequently traded ETPs may have lower spreads but the spread tends to increase when markets are more volatile. The spread varies over time and is not predictable - spreads are often highest shortly after the stock market opens and shortly before it closes. Many ETPs have a lower spread in mid-afternoon when the US stock market is open.

  • What does it cost to buy and sell ETFs and ETCs through Hargreaves Lansdown?

    You can buy and sell ETFs and ETCs online from £11.95 per deal. If you deal frequently this could reduce to £5.95 per deal online. There is no stamp duty. Find out more about our charges.

  • What does it cost to hold ETFs and ETCs with Hargreaves Lansdown?

    It is free to hold ETFs and ETCs within the Vantage Fund & Share Account. The charge to hold ETPs in the Vantage ISA or SIPP is 0.45% (capped at £45 in the ISA and £200 in the SIPP). Find out more about our charges.

  • What is the annual charge on an ETF?

    Most ETFs quote an on-going charge figure or total expense ratio (TER). However, swap-based ETFs and currency hedged ETFs may have additional costs which are not included in this figure. For full details you should read the issuer's important documents. You can find the TER and the important documents on the 'at a glance' tab of the ETP factsheet on our website.

  • What is the annual charge on an ETC or ETN?

    Most ETCs and ETNs quote an annual management expense ratio figure, though this may not include all costs of running the investment. ETCs and ETNs are not obliged to quote a TER figure, though some do. If not, it is important that you read the issuer's important documents. You can find cost figures and the important documents on the 'at a glance' tab of the ETP factsheet on our website.

  • What does Reporting Status mean?

    Most ETFs are domiciled outside the UK - as such they are often treated as offshore investments for UK taxpayers.

    You will pay income tax on any dividends that are paid by the ETF but unless an offshore ETF has UK reporting status for the entire period that the investor holds it, any gain on that ETF will be taxed as income instead of capital gains. This could subject the investor to significantly higher levels of taxation. Tax is complex and depends on your circumstances - for more information consult a tax accountant.

  • Will an ETP perform identically to the index it is tracking?

    It's not possible to invest directly in an index and whilst ETPs try to perform as closely in line as possible to an index, it is often not perfect. The most common measure of an ETP's ability to track its index closely is often called tracking error and a more precise ETP is said to have a lower tracking error.

  • Charges

    The provider will levy an annual charge for managing an ETP. Other charges, such as dealing costs for acquiring and disposing of the underlying investments, will also be charged to the ETP. If the underlying investments track the market accurately, and there are charges involved, the performance of an ETP will fall behind that of the index.

  • Dividends

    The majority of indices are calculated without factoring in dividends or income payments from an investment. ETPs however are entitled to dividends and performance figures generally include dividends.

  • Index timing

    Performance can appear different because of the timing of the index calculation. For example, ETF performance in the UK is normally calculated at the close of the London Stock Exchange - 4.30pm. However, for an ETF tracking the US S&P500 index, this is 11.30am in New York. The S&P 500 is calculated at 4pm US time, or 9pm in the UK. The ETF could have tracked the index perfectly until the UK market closed, but performance figures would not take into account any movement after this point.

  • Partial replication

    Some indices contain shares which can be difficult to deal. These are typically smaller companies' shares or companies listed in emerging markets. However, it can affect any company where the value of shares traded daily is low. The ETP may choose to ignore these companies and instead purchase larger companies within the same index which can be acquired more easily. No two shares perform in the same way and the divergence in performance contributes towards the tracking error. This could for or against an investor.

  • Cash drag

    When dividends or other cash payments are received the ETP may hold cash. The cash may receive a small daily interest payment but this is likely to differ from the return if that money had been invested.

  • Index changes

    The constituents of an index can change and the ETF provider will need to restructure the ETF. This can carry transaction charges and there may also be a delay between the index being updated and the date on which the ETF's holdings are changed. Both of these factors can create a disparity. This could for or against an investor.

  • Rolling future positions

    A future is a contract that allows someone to buy a fixed amount of a specific commodity at a set date in the future.

    The price of a future often offers a good proxy to the spot price, but they do not always move in tandem. The futures price can differ from the spot price for a number of reasons, including interest rates, the cost of storing a commodity, and market expectations. For example, if oil has a spot price of $100 per barrel and it costs $2 per month to store and insure a barrel of oil, the futures price for delivery of a barrel of oil in a month's time may be $102.

    The situation where the futures price is higher than the spot price is known as 'contango', and the opposite is known as 'backwardation'.

    Contango in particular causes problems for ETPs which use futures contracts. Most futures contracts expire on a rolling monthly basis and, as it costs significantly more to store and insure a barrel of oil for a month than for a day, these costs fall as the end of the contract approaches and the price of the future moves towards the spot price.

    In the example above, assuming the current, or 'spot', price remains at $100 per barrel, an ETC purchases a futures contract for one barrel of oil which expires in a month's time for $102. After a month, the ETC will need to 'roll-over' the futures contract - effectively selling the old future and buying a new one for a month's time. If the old future was not sold, the ETC would have to take delivery of the physical oil (which it has no need for). The futures contract purchased for $102 has reduced in price to $100 as it nears expiry. The cost of a new contract is $102, so the ETC has made a loss of $2 even though the spot price has remained constant.

  • Will I always get my money back?

    No. Like all stock market investments, the value of an ETP will rise or fall and neither the capital nor income is guaranteed. All ETPs are linked to the value of an asset or index, but in times of market uncertainty the value at which you can buy or sell the ETP may be different from that of the index.

  • What are counterparties, is there a risk?

    Counterparties are third parties, often investment banks, who are involved with the ETP. For example, a counterparty might be an institution providing a "swap" derivative, borrowing a stock or issuing an ETN. If a counterparty ran into financial difficulties, there is a chance that the ETP could lose money, cease trading temporarily or be wound up altogether.

  • What is collateral and what is its purpose?

    Collateral is a set of stocks, bonds or cash, unrelated to the index the ETP tracks. It is sometimes used whenever an ETP has dealings with a counterparty. ETFs hold collateral when they lend stock, equal to the value of the stock lent. Some ETNs hold collateral whereas many do not.

    Swap-based ETFs hold collateral of normally at least 90% of their value. They may be structured as "funded" where the collateral is held outside the ETP, or "unfunded" where the collateral is held inside the ETP. Most swap based ETFs rebalance their collateral regularly, often either daily, weekly or when the collateral drops below a certain level. Many managers keep collateral in swap based ETFs over 100% of the value of the ETF, in some cases this may be as high as 110%. Products which rebalance their collateral holdings tend to be less risky.

  • What is the risk of stock lending?

    Many ETFs lend stock to a third party in exchange for a fee. Throughout the loan, the ETF remains the beneficial owner of the shares, is entitled to all dividends and has the right to recall the stock at any stage. The ETF is normally given collateral (often cash or a different stock) to hold whist the stock is on loan, but there is a chance that the ETF could lose money if the loan can't be recovered. In this case, the collateral will be used to refund the ETF. The risk that a borrower fails to return borrowed stock is sometimes called counterparty risk.

  • Are physical ETFs riskier than swap based ETFs?

    Each type of ETF is exposed to different risks and physical ETFs are not necessarily less risky than swap-based ETFs. Physical ETFs often lend stock, whereas swap-based ETFs use a swap issued by an investment bank. In each case they are exposed to counterparty risk if the third party gets into financial problems. Both will hold collateral - unrelated cash, bonds or stock which can be used to refund the ETF if problems occur. Swap-based ETFs use a derivative so their performance is often more accurate than a physical ETF which may partially replicate its portfolio, but the swap may have costs which the ETF issuer does not disclose. In all cases, we suggest that it is always a mistake to invest in something you do not understand.

  • What is UCITS

    UCITS is a set of voluntary rules which many ETFs follow. ETFs which are UCITS compliant must follow minimum standards - that includes holding a diversified portfolio, publishing clear guidance on their charges and taking steps to safeguard investors' money. Some ETPs are not eligible for UCITS standards - including ETCs, ETNs and US-listed products. UCITS products are not necessarily safer, nor are non-UCITS products necessarily riskier, but if a product is not UCITS compliant you should take care to read the relevant issuers' documents.

  • Am I covered by a compensation scheme?

    Most ETPs are domiciled outside the UK and therefore not covered by the UK's Financial Services Compensation Scheme (FSCS). However you may be covered by a compensation scheme in the region where the ETP is based. You will need to check rules individually to verify this.

  • How do I find out the specific risks associated with my ETP?

    For full details relating to the risks of a particular ETP you should read the relevant Key Investor Information Document (KIID) and Simplified Prospectus. These can be found on 'at a glance' tab of the ETP factsheet on our website.

Important information

Past performance is not a guide to future returns. Nothing in this video should be construed as personal advice; if you have any doubts about the suitability of an investment for your circumstances you should seek expert advice.

The value of investments will fluctuate (this may be caused by exchange rate movements) and are not guaranteed, this means investors may get back less than they invested. The investments shown in this video are used to demonstrate how ETFs work and are not a suggestion to invest. If you are unsure please seek advice.

The range of exchange traded products is huge, please make sure that you know the features and risks of any fund before you invest. The prospectus is a good source of information.



Hargreaves Lansdown is authorised and regulated by the Financial Conduct Authority.

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