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ETFs and ETCs – the war of the acronyms

I keep hearing about ETFs and ETCs and wonder what are they and what’s the difference? And why are they so popular nowadays?

An ETF is an Exchange Traded Fund and ETC is an Exchange Traded Commodity. ETFs historically were used to track a certain commodity like gold or oil. Recently, there were some changes emanating out of the UK markets, which expanded the sector to include ETFs that invested in stocks and indices and, therefore, allowed investors a way to track other indices such as technology. These funds are very popular in places such as the US as there are so many companies to invest in and people wanted another way to be “in the market”.

An ETF is essentially an index fund that trades like a stock.

There are ETFs covering everything from broad stock indexes to individual commodities, and the number of funds has been growing dramatically in recent years – from fewer than 200 in early 2005 to well over 800 in early 2009. They’re low-cost, tax-efficient funds (most with annual expenses of 0.35 per cent or less) that provide access to a broad range of securities in an asset class such as large US stocks, small US stocks, international stocks or investment-grade bonds.

For a gold ETF, the Gold Index is comprised of many companies and Newcrest is the elephant in the room with a weighting in the Gold Index of 46 per cent followed by Lihir Gold with a weighting of 21.37 per cent. The rest fall away rapidly. You do get exposure to other gold companies in this ETF, but you’re more exposed to the biggies.

Meanwhile, ETCs are open-ended, transferable securities designed to track spot bullion prices less fees. They’re 100 per cent backed by physical allocated bullion bars, which have unique reference numbers – all allocated bars conform to LBMA and LPPM specifications and the bullion is held in a vault by the custodian, HSBC. ETFS Physical Precious Metals ETCs have no credit risk and trade and settle like equities.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, June 18, 2010

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