Over recent years there has been significant growth in the number of Exchange Traded Products (ETPs) available to investors. As the name suggests, the attraction of ETPs is that they can be traded on a stock exchange, such as the London Stock Exchange (LSE). This means they are likely to have regular and transparent pricing.
Barclays Stockbrokers offers two main types of ETPs – Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs). Below we highlight the key differences between them both:
|Listed on Stock Exchange
||An underlying index, typically share or fixed income - FTSE 100, S&P 500, FTSE UK Gilts All Stocks index
||Commodities – metals, natural energy resources, livestock, agricultural produce|
As with all investments the value of ETFs and ETCs can go down as well as up so you could lose money. If you’re considering investing in either ETFs or ETCs, you should read the product prospectus first to ensure that you fully understand the product, its structure and the associated risks.
Some 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 ETFs and ETCs 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. Even in instances where the counterparty provides collateral – i.e. sets aside assets to the value of their obligations.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.