CNBC Business | Profit Scenter

Profit Scenter

Josephine Moulds tracks down the hot stocks to watch in July and guides us through Exchange-Traded Funds

A BRIEF GUIDE TO ..... EXCHANGE-TRADED FUNDS

What are ETFs and ETCs? And what do they enable a private investor to do that they couldn’t do already?
Exchange-traded funds (ETFs) are designed to track a particular exchange or index and allow investors to buy into, and spread risks across, a range of companies through a single share. The similar exchange-traded commodities (ETCs) are investment vehicles that track the performance of an underlying single commodity or commodity index.

ETCs enable investors to gain direct exposure to an increasing range of commodities – without trading futures or taking physical delivery. They are open-ended, traded on regulated exchanges and offer investors high liquidity. There are also short ETCs that are designed to make money if the underlying falls in value, as well as leveraged alternatives that magnify the size of the price movements.

How long have they been around and how many of them are there today?
The first ETC, Gold Bullion Securities, was launched in 2003 by ETF Securities and the World Gold Council. At the end of March, there were 122 ETCs in Europe, with 300 listings managed by two managers on five exchanges. ETC assets under management in Europe increased by 51.4% in the first quarter of the year to reach $7.4bn.

What are the investment strengths and weaknesses?
The surge in commodity prices has been one of the most dominant investment themes of the last few years. Commodities add balance to a portfolio, can be used as an inflation hedge and have low correlation to equities and bonds, which should provide reduced risk without necessarily reducing returns.

What are the entry & exit fees? Tax implications?
Brokers or financial advisors will charge normal transactions costs (commissions) associated with the purchase or sale of ETCs. ETCs are passive investments and have some of the lowest expense ratios among registered investment products. The average annual management fee is 0.6%. ETCs are not shares and are not subject to stamp duty or stamp duty reserve tax.

How do I buy and sell ETCs?
Investors can buy and sell ETCs throughout the trading day on regulated stock exchanges through ordinary brokerage accounts in the same way as ordinary shares. ETCs are ‘open ended’ securities, which are created and redeemed on-demand. This means that the supply of ETCs is unlimited and that price changes will mirror developments in the price of the underlying commodity.

Where do I go for more information and unbiased advice?
ETCs currently trade on the following regulated stock exchanges around the world:

London Stock Exchange

www.londonstockexchange.com/etcs

Deutsche Börse (Xetra)

www.deutsche-boerse.com/etcs

Euronext Amsterdam (www.euronext.com/etcs)
Euronext Paris (www.euronext.com/etcs)
BorsaItaliana (Milan) (www.borsaitaliana.it/quotazioni/etfefondi/etf-plus.htm< /a>)
Mexican Bolsa (www.bmv.com.mx)

ETCs LISTED ON THE LSE 2006/2007

	1 year (per annum)	5 years (per annum)
All Commodities	24.7%	16.7%
Agriculture	47.0%	9.3%
Energy	38.0%	13.7%
Ex-Energy	18.1%	16.9%
Grains	58.6%	11.3%
Industrial Metals	-9.2%	33.4%
Livestock	-21.2%	-0.4%
Petroleum	65.0%	31.3%
Precious Metals	24.1%	21.8%