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ETFs Overview

Advantages of ETFs

ETFs Overview

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Advantages of ETFs


Simplicity

One completely normal stock market trade gives you diverse exposure to the underlying investment asset class. Normal settlement and custody arrangements apply. As Sterling denominated share classes are generally available regardless of the currency of the underlying investments, there is no complicated foreign currency accounting required.

Flexibility

This ability to buy into or sell out of a whole asset class with one simple transaction also  means that an investment portfolio can be adjusted quickly and easily in response to  changing stock market conditions. For example, in a suddenly falling market a portfolio’s exposure to UK equities could be, say, halved with just one trade. There is no need for any of the time consuming stock-by-stock construction of a selling programme that is usually required. They are also a tool for shorting for investors who are so inclined – ETFs can be borrowed to sell short and there is even a breed of short or inverse ETFs which go up proportionately when their underlying index goes down. Pan Asset does not sell short or use short-selling or leveraged ETFs.

Liquidity

ETFs are as liquid as the underlying market. If liquidity in the individual ETF is poor on a given day you can ask the manager of the ETF to redeem the shares and to sell the underlying holdings. The market makers quote  competitive buying and selling prices throughout the dealing day and since ETFs are  open-ended funds there is a creation and redemption process between the market makers  and the ETF sponsor that prevent their prices diverging significantly from the underlying  fund asset value. The transparency of ETFs and the fact that the holdings within ETFs are liquid exchange traded investments means that any discrepancies in price that might emerge are quickly arbitraged away.

Cost Efficiency

ETFs have no entry or exit fees, dealing spreads are tight and their internal management fees are much lower than normal pooled funds – typically only 0.2% per annum for cash and bond ETFs, between 0.3% and 0.7% for equity ETFs and 0.4% to 0.9% for alternative ETFs. These are often half or less the fees charged by actively managed pooled funds.  Furthermore, no Stamp Duty is payable on secondary market purchases.

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