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Short Guide to Exchange Traded Funds

Short Guide to Exchange Traded Funds

ETFs have been one of the fastest-growing types of investment fund worldwide, providing a low-cost way to provide index tracking.  They combine the advantages of an open-ended capital structure (e.g. Unit trust/OEIC) with the efficiencies of exchange-traded instruments (e.g. equities). This is useful reading for those who are preparing to sit any of the CII R02, J10 or AF4 exams.


The main features of ETFs are:

  • They are set up as a company, which is normally a SICAV or OEIC
  • The management structure is often an ICVC
  • The authorisation is in the country where the fund is domiciled
  • Indexation methodologies can be physical or synthetic
    • Physical replication will be one or a combination of the techniques used in other index-tracking funds, i.e. full replication, stratified sampling or optimisation.
    • Synthetic replication will often be carried out using derivatives, particularly a swap (swapping the return on an index for a payment) – these can either be funded or unfunded (the normal route). This means that responsibility for tracking the index is passed onto the counterparty, so does add counterparty risk.
  • ETFs value their portfolios daily and provide details of their NAV and number of shares in issue via RNS.
  • ETFs are listed and traded on stock exchanges, giving the ability to trade at any time.
  • They trade at prices very close to the NAV.
  • They have no initial fees and have TERs and OCFs lower than similar index-tracking funds.
  • There will be broker fees on trades but no stamp duty.


ETFs are increasingly being used as core funds in core-satellite portfolios, and the market for them is likely to keep on growing.

Glossary of Acronyms

ETF – Exchange Traded Fund (sometimes called ETP or Exchange Traded Product)

OEIC – Open Ended Investment Company

SICAV – Société d’Investissement à Capital Variable (French for OEIC, normally Luxembourg-based)

ICVC – Investment Company with Variable Capital

NAV – Net Asset Value

RNS – Regulatory News Service

TER – Total Expense Ratio

OCF – Ongoing Charges Figure

Grab the resources you need!

If you’re studying for your CII R02 exam, and you want to feel confident as you walk into the exam room, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the R02 calculation workbook taster now!

Click here to download our free calculation workbook taster for CII R02

Alternatively, you can download taster resources for J10 or AF4 if you’re revising for either of those exams.