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Exchange Traded Fund Guide

Value for money

ETFs offer transparency and openness.

No frills
Pure exposure to equities
A fund whose assets comprise equities in the ratios determined by an index, offers a simple and transparent means to equity ownership. Since the fund is identified by the relevant index the nature of the equities owned within the fund are self evident. So a country index will reflect the equities of the relevant country and a sector the direct holdings as indicated by the chosen benchmark.
This means that the ETF is an ETF is an efficient investment tool that offers a pre-specified outcome to its investor

Product development potential
ETFs are not burdened by the complications of elaborate investment strategies and the consequent fees structures. This means that the fund is an effective and low cost means to investment.
Accordingly product providers may want to use ETFs within their own new schemes that they establish to allow regular savings plans that meet the necessary criteria for ISAs or Pensions, with or without CAT marks.
The product provider would thereby simply be making a proposal to an investor on how to save/invest by offering administration services, when the actual process of equity investing is handled by the ETF.
Openness
Benefits of competitive arbitrage
As an ETF grows it provides units in itself to new investors. Most open ended funds do this by accepting cash for subscriptions; this does not happen with an ETF.
The critical feature of an ETF is that professional securities dealers facilitate the subscription process with a transfer of physical shares. To meet subscriber demand new units are created when the shares are transferred into the fund, so enlarging the assets of the ETF. The process is completely transparent since the constituents of the fund are known, the price of the fund is known as are the constituents.
The mechanism of arbitrage available to the professionals in creating new units and redeeming old units should continually correct the price to accurately reflect the underlying assets.

Institutional expertise available to all
The arbitrage activity and basket trading that it requires remains the preserve of institutional traders. Similarly the low cost of management charges levied against the ETF are usually only available to substantial investors who can create economies of scale for their managers.
However due to the ETF being available on an exchange and equally available to investors large and small, anyone can now participate in the benefits of such institutional expertise.
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