Exchange Traded Products

Question 1

3 types of exchange traded products

Answer 1

Exchange traded funds ETFs

Exchange traded commodities ETCs

Exchange traded notes ETNs

Question 2

ETFs - characteristics

Answer 2

Index tracker funds listed and traded on major stock markets

Legal structure is a company

Designed to match return on index they track

If full replication isn’t used - known as sampling or optimism

Some use synthetic replication

Valued daily

Trades close to NAV

Question 3

ETFs - charges and taxation

Answer 3

No initial fees

Typically lower OCF

Brokerage fees on trades

No stamp duty on purchases

Income tax on dividend payments

CGT on disposal gains

Eligible for ISA inclusion

Question 4

Exchange traded commodities - characteristics

Answer 4

Pooled investments listed on LSE

Tracks performance of underlying commodity or basket of commodities or index

Traded and settled like normal shares

Question 5

Exchange traded notes - characteristics

Answer 5

Traded on stock exchange

Performance tracks movement of index

Type of bond issued by bank (unsecured)

Additional risk as value affected by credit rating of issuer

Maturity date but don’t pay interest

No portfolio of investments

Use derivatives to track index instead of owning anything

Question 6

4 methods an ETF would use to track its underlying index

Answer 6

Full replication

Synthetic replication - uses derivatives

Optimisation - used computer algorithm

Sampling - buys a sample of index constituents