Top 10 ETF purchases:
Week ending 21/10/2016
The Top 10 ETF purchases are measured by the total number of purchases of Exchange Traded Funds made by Barclays Stockbrokers clients during the past week.
The list should not be taken as a recommendation to buy or sell any particular ETF and it is not intended to offer any form of advice. Past performance is not an indicator of future returns.
Whilst the value of all investments can go down as well as up, so you could get back less than you invested, some ETFs are riskier than others and so you could lose some or all of your money. If you’re unsure whether ETFs or any investments are right for you, please seek independent financial advice.
If you want to hold ETFs in an Investment ISA or Self Invested Personal Pension (SIPP), you should check that the ETF is Investment ISA or SIPP eligible. You’ll find this information in the ETF factsheet.
ETFs and risk
As well as the risks mentioned above, there are some other features of ETFs that you should consider carefully.
Counterparty risk - Many ETFs do not use leverage and achieve their objectives by purchasing a diversified pool of assets, e.g. the individual stocks that make up the FTSE 100. However some achieve their objectives through the use of derivatives, typically swaps, which carry counterparty risk. If the counterparty, i.e. the issuer of the derivatives, does not pay the sums due, or goes bust, you could lose all of your capital. If this happens you will not be protected by the Financial Services Compensation Scheme. This is regardless of the performance of the underlying assets. This applies even in instances where the counterparty provides collateral - i.e. sets aside assets to the value of their obligations.
Leveraged ETFs and inverse ETFs - there are some more complex ETFs available on the market. These include ETFs that offer leverage, i.e. where gains or losses can be magnified, and ETFs that are designed to perform inversely to their underlying index or benchmark, i.e. they aim to go up in value when the market falls and vice versa.
Leveraged ETFs and inverse ETFs also have unique compounding and daily reset features which can significantly increase risk.
Compounding is the cumulative effect of applying gains or losses from one time period to the sum invested, plus the gains or losses and income from a previous time period. The effect of compounding can lead to gains or losses that occur much faster and to a greater degree than with conventional investments.
The daily reset features of ETFs can also have a significant impact on returns. Because exposure to a particular index resets at the end of every trading day, performance over a longer period can often deviate from what investors might be expecting, potentially producing inferior returns.
Leveraged ETFs and inverse ETFs are highly complex financial instruments that carry significant risks. They are generally designed for day traders and not suitable for investors who plan to hold them for one trading day or more. They are only suitable for experienced short-term investors who fully understand and accept these risks.
These types of ETF can exaggerate market movements and can be extremely volatile. There is a risk that you could lose all or some of your money. Before investing in any leveraged ETFs and inverse ETFs, you should read the individual prospectus carefully and seek independent financial advice if you’re unsure.
Taxation – the majority of ETFs are offshore funds and specific taxation rules apply for investors subject to UK taxation. Broadly if an offshore fund has “reporting status” then gains are subject to capital gains tax. If an offshore fund does not have “reporting status” then gains are subject to income tax. Please ensure you understand the expected tax treatment fully before making an investment decision. If you are unsure, please seek independent taxation advice.