Can IFAs advise on ETFs?
Yes. All advisers that have received authorisation from the FSA to 'advise on investments' are permitted to advise on exchange-traded funds. ETFs are covered under the FSA’s packaged product regime and are treated similarly to other collective investment schemes like unit trusts, SICAV (Société d'Investissement À Capital Variable), OEICs (Open Ended Investment Company), and FCPs (fonds communs de placement).
Does my ETF have UK distributor status?
This has been a popular question in the wake of a slew of recent news articles regarding the tax treatment of ETFs that do not have UK distributor or reporting status. ETFs that do not have distributor or reporting status will be taxed at ordinary income tax rates for UK investors as opposed to less onerous capital gains rates for those that do sport the designation. The full list of overseas funds registered for distributor status in the UK can be found on the HM Revenue & Customs site. Can’t find your fund? Be sure to check directly with your ETF provider to verify whether or not they have applied for the fund to be granted distributor or reporting fund status, as it is applied retroactively.
What are the pros and cons of swap-based ETFs?
We have talked extensively about the difference between physical replication and swap-based funds in the past, so we won’t repeat ourselves here. The most significant pros of swap-based ETFs include better tracking and lower costs. Tracking error is minimised by the fact that the fund’s return is derived from a total return swap rather than a full or sampled physical portfolio of the reference index’s underlying components. For this same reason, swap-based ETFs are also less expensive to run (they don’t incur trading costs, cash drag, etc.), and these cost savings are in turn often shared with fund holders in the form of lower total expense ratios. However, there is no such thing as a free lunch. Improved tracking and lower fees come at the expense of counterparty exposure. Investors should ask themselves if they are being adequately compensated for this additional source of risk. For a complete discussion of the different sources of counterparty exposure in ETFs, please review our recent webinar Hidden Risks in ETFs.
