Types of exchange traded investments
Exchange traded investments have increased in popularity recently, driven in large part by private investors' appetite for commodities. The diversity of exchange traded investments available has also increased, with the launch of some which track more exotic markets and others that are more complex. Like all stock market investments they carry risk and in some cases significantly higher risks than other investments.
Types of exchange traded investments:
Exchange Traded Funds (ETFs)
ETFs are designed to track a particular stock market index. The underlying assets can be either "physical" (such as shares) or "synthetic" (in which case the assets are complex financial instruments, such as futures or options, usually issued by an investment bank). The assets are often held by a custodian.
Exchange Traded Commodities (ETCs)
An ETC invests in or tracks a commodity or basket of commodities. Like ETFs, the underlying assets can be either physical or synthetic.
Exchange Traded Notes (ETNs)
ETNs differ from ETFs and ETCs in that they are unsecured investments. They are not supported by underlying assets. Instead, the provider agrees to match the return of the index. The return from the ETN is therefore wholly dependent on the ability of the provider to meet its obligations.
As the ETN provider does not own the underlying assets, they do not have to pay dealing charges associated with purchasing those shares and so the annual fees are generally lower. Also, the ability of an ETN to accurately track an index is greater than that of an ETF or an ETC as the issuer does not have to buy and sell assets to reflect changes in the weightings of an index.
ETNs have a maturity date. This means on maturity, your capital will be returned to you, subject to the performance of the index and the ability of the issuer to pay. They can also be sold by investors in the interim, subject to normal stockbroking fees.
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The value of exchange traded investments can go down in value as well as up, so you could get back less than you invest. Exchange traded investments are not suitable for all investors, if you are unsure of their suitability please seek advice.
The protections available under the Financial Services Compensation Scheme will not normally be available in connection with exchange traded investments domiciled outside the UK.
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