Francis Groves - Exchange Traded Funds: A Concise Guide to ETFs

This is an introduction to exchange traded funds (ETFs), the latest generation of collective investments. The aim of this book is to show how ETFs are constructed, the way they work and the different asset classes ETFs now cover.

The main focus of the book is on ETFs that track indices, as these are undoubtedly the most important in terms of their range, the amounts of money invested and the advantages they offer. Further, every ETFs performance is inextricably linked to the index it tracks. The principle that to understand an ETF it is also necessary to thoroughly understand the underlying index is a key theme of this guide and the workings of several kinds of index are examined.

The range of ETFs described here include those tracking indices for equities, fixed interest securities, money markets, currencies, credit markets, property and commodity futures. ETFs offering methods of imitating hedging strategies are also explained, together with the new generation of active (as opposed to index tracking) ETFs. Of these ETFs for various asset types, by far the most important are those that track equities. For this reason, the main focus of this book is on equities and readers should assume that the book is referring to equity ETFs unless otherwise stated. For more on the prevalence of equity ETFs see A perspective on the different ETF asset classes.

Most of the ETFs covered in this book are listed on the London Stock Exchange (LSE). However, most ETF providers are not UK businesses and most London-listed ETFs are domiciled in other European Union (EU) member states (which means the ETFs are legally registered outside the UK). For this reason, careful attention has been paid to the European Union and UK regulatory framework that ETFs operate under. At points throughout the book I refer to European ETFs these ETFs are available to UK investors, but since they are regulated in the same way throughout the EU it is helpful to refer to them as European ETFs (as distinct from American ETFs, which are regulated differently). This distinction between European and American ETFs is important because one of the broadest divisions between types of ETFs is that between those in Europe and America the history of ETFs, their regulation and how the funds operate is different in the US.

This does not mean we will ignore American ETFs altogether. Two of the most important ETF providers in the UK are American companies Blackrock iShares and Invesco Powershares. Also, many of the important developments in ETFs have taken place in the United States and many of the cutting edge ETF refinements are taking place there. This being the case, the guide provides the American context to important ETF developments.