Exchange Traded Funds (ETF)

ETFs are listed on an exchange such as the London Stock Exchange, and often endeavour to replicate an index such as the FTSE 100 by investing in equivalent assets and proportions. The objective of replicating an index in this manner is so it should perform equally to the index that it replicates.

There are a wide range of indexes that are replicated by ETFs; including metals, energy, commodities and currencies. As they require no active management, being passive investments, they tend to be low cost investments although there are always exceptions.

There are some ETFs, typically known as synthetic ETFs that exist to replicate the performance of indices by using derivatives instead of shares. Investors are exposed to the risk of the index performance and the event that the party supplying the derivative becomes insolvent. Some derivatives may ‘short’ the index that is replicated, in other words the fund generates a profit if the index falls instead of rises but consequently loses money it should rise.