ETFs for beginners: what’s in a name?
To the beginner, the world of ETFs may appear daunting because of the terms used to describe each ETF and its characteristics. But once you’ve cracked the code, there’s a wealth of information that will help you pick a portfolio and know exactly what you’re investing in.
Most people are familiar with the naming conventions for stocks and stock indices, and terms like FTSE 100 and Lloyds Banking Group are virtually household names, even if many would struggle to define exactly what the index or firm encompasses.
By contrast, the naming conventions for Exchange Traded Funds (ETFs) may appear more complicated to those unfamiliar with how they work. In fact, an ETF’s name tells you much more about the fund you are buying than a traditional financial instrument name. Once you understand the terms and abbreviations, it should make selecting your ETF portfolio a breeze.
ETFs are investment products made up of a selection or ‘basket’ of related assets. They are designed to track the performance of indices, sectors, and bonds. Similarly, Exchange Traded Currencies and Exchange Traded Commodities (ETCs) allow investors to follow the performance of currencies and commodities. Collectively, these products are known as Exchange Traded Products (ETPs).
As an example, let’s look at the UK’s first ETF that was created to track the FTSE 100 index and that remains one of the most popular today: ISF.L – iShares Core FTSE 100 UCITS (Dist) (£). You can find its factsheet in IG’s ETF screener tool.
1. What is an ‘Exchange Traded Fund’ (ETF)?
As investment funds, ETFs provide exposure to a portfolio of financial instruments, but have the added benefit of being traded just like shares on a stock exchange. Hence the name ‘exchange traded.’ Every instrument listed on an exchange has a unique exchange ticker symbol and the first part of an ETF name is this symbol. In the case of our example, ISF is its unique symbol and .L tells us it is listed on the London Stock Exchange (LSE).
Because it’s listed on the LSE, it is tradable for the duration of the exchange trading hours (8am-4.30pm Monday-Friday), which is also when the underlying components, ie the 100 biggest companies listed on the LSE by market capitalisation, which make up the FTSE 100, of the fund are tradable on the LSE.
It’s a ‘fund’ because it allows you to invest with others in a pool of resources. If you were to invest in the FTSE 100 yourself, you’d have to buy and sell shares in all the 100 stocks that make up the index.
2. What is ‘iShares’?
iShares plc is the issuing company owned by giant US fund manager, BlackRock Inc.
3. What is ‘Core’?
iShares has a Core series that comprises nine of its most popular funds.
4. What is ‘FTSE 100’?
The FTSE 100 is the Fund Benchmark Index. The FTSE 100 index is made up of the 100 largest UK stocks by full market value. The fund allows the investor to have direct investment into blue-chip companies representative of sector leaders in the UK.
5. What is ‘UCITS’?
ISF.L is an UCITS (Undertakings for Collective Investment in Transferable Securities) Fund which means the Fund must comply with the requirements of the UCITS directive designed to ensure investors receive a wider choice of product at lower cost in European funds.
6. What is ‘Dist’?
‘Dist’ stands for ‘distributor status’ which crucially means that gains are subject to capital gains tax and not income tax. ISF.L has UK Reporting/Distribution status and so it is tax efficient. ETFs listed in the UK with UK Reporting or Distributing status are different to other equities listed on the LSE as they are subject to capital gains tax (CGT of 20% or 28%) upon selling ETF shares at a profit, rather than being charged as income tax (up to 50%).
7. What is ‘£’?
The pound symbol ‘£’ refers to the base currency of the fund. So in the case of our example, the fund is denominated in pounds sterling.
Key terms on an ETF factsheet
That’s the basics of the naming of ETFs. However, there are a few other key terms you need to understand and we’ve highlighted them below.
If you’re new to ETFs, why not download an example Factsheet from IG’s ETF screener and go through it at the same time?
The asset class for ISF.L is ‘equity’, which describes the type of assets contained in the fund i.e. FTSE 100 equities.
Other asset classes include: Fixed Income, Money Market, Commodities, and Alternatives.
Asset weightings – the percentage of assets/sectors/regions and other components held within the underlying index.
Here’s the makeup of ISF.L – iShares Core FTSE 100 UCITS (Dist) (£):
Total Expense Ratio (TER) is a measure of the costs associated with managing and operating the product including expenses such as trustee, custody and registration fees. It is expressed as a percentage of the fund's total net asset value. For ISF.L the TER is 0.07% and represents the total cost to the investor of holding the investment for one year.
Total Cost of Ownership includes the TER and other costs such as a management fee and the bid/ask spread.
Product structure – physical or synthetic. This indicates whether the fund buys the actual underlying securities in the index (ie physical) or whether the fund gains exposure to those securities by buying derivatives, such as swaps (known as ’synthetic’). Swaps are a form of contracts that promises to provide the return of the security to the fund, but the fund does not hold the actual security. This can introduce a risk that the counterparty defaults on the ‘promise’ or contract.
Structure – Exchange Traded Fund (ETF), Exchange Traded Commodity (ETC) or Exchange Traded Note (ETN).
Domicile – The country in which the product is based. ISF.L is based in Ireland.
ISA eligible – ETFs are listed in the UK with UK Reporting or Distributing status so UK investors can benefit from holding their ETFs in a tax wrapper account such as an Individual Savings Account (ISA). ETFs that don’t hold UK Reporting status cannot be held in an ISA. Non-European Economic Area (EEA) ETFs are not eligible to be held in an ISA, unless it was authorised for sale in the UK by Financial Services Authority (FSA).
Type – Distributing (Dist) vs Accumulating (Acc). Income distribution is a term used in ETFs for when any income or dividend payments are redistributed to investors in the form of a payment. Accumulated distribution is a term related to ETFs trading, meaning that the ETF in question reinvests any income and dividend payments back into the fund.
Distribution frequency – indicates how often a distribution is paid by the product. The most common distribution frequencies are quarterly, semi-annually, and annually. Distribution for ISL.L is quarterly.
Compliant – Reporting fund status, UCITS IV compliant.
Benchmark index – in relation to a fund, the index against which the return of the fund will be compared. For ISL.l, that’s the FTSE 100.
Currency hedged – hedged products use derivatives to reduce the impact of currency movements on returns. See Key investor information document (KIID) for this information. Examples are: iShares MSCI Japan USD Hedged UCITS ETF, iShares MSCI Europe ex-UK GBP Hedged, UCITS ETF and iShares $ Corporate Bond CHF Hedged UCITS ETF. KIID issued in respect of each fund pursuant to the Regulations, as may be amended from time to time in accordance with the Central Bank UCITS Regulations.
Costs – UK investors pay no stamp duty on ETF investments. There are no management fees on passive index funds such as ETFs.
Reuters instrument code (RIC) – shows the current price of the fund and the dealing function. It’s a ticker-like code that’s used by financial data and information provider Thomson Reuters to identify financial instruments and indices.
Methodology – indicates whether the product is holding all index securities in the same weight as the index (replicating) or whether an optimised subset of index securities is used (optimised/sampled) in order to efficiently track index performance. For ISF.L the fund is a full replication of the physical stocks.
Sector breakdown – the percentage weighting of sectors within the fund.
Leveraged – leveraged position multiplies both the positive and negative returns on investment, so be careful. Both long and short positions can be leveraged. The potential returns and losses from a leveraged position will be greater than from the equivalent unleveraged position. Such ETFs can be 2x (times) or 3x leveraged. For instance, if the FTSE 100 increases 10% in a day, a 2x FTSE ETF will aim to increase 20%.
Short – short position in a security, such as shares, means that the holder of the position will profit if the value of the security goes down. This is in contrast to a conventional long position, where an investor profits from a rise in the value of the asset. Short positions can be used to protect against, or profit from, declining asset prices. Such short ETFs can be -1x (times), -2x or -3x, so again caution should be taken with these.
Socially responsible – socially responsible investing, or ethical investing, is an investment strategy that seeks to return profit while taking the wider ethical implications of investments into account.