Exchange Traded Funds and Stamp Duty


Q. What is an Exchange Traded Fund (ETF)?

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A: Exchange Traded Funds (sometimes referred to as tracker shares) represent a portfolio of securities which can be stocks, bonds or other assets - that track the performance of a specific market index, in fact you can pick an ETF which tracks bonds or commodities or currencies...etc The primary idea of an ETF is the ability to buy or sell bundles of different shares..etc in one go which bundles can be based on indices, sectors or types of stock (shares or bonds). One can even trade Forex ETFs using exchange-traded currency products where you can go long or short on currencies. In the UK, the ETF market is slowly catching up (it is still quite small compared to the USA ETF market, probably because financial advisors don't have any incentive to promote them) and the main promoters of exchange traded funds are ETF Securities, Deutsche Bank's db x-trackers, iShares (which are part of BlackRock) and Societé Generale's Lyxor. Moreover, HSBC, PowerShares, as well as London hedge fund Marshall Wace have recently entered the market.


ETFs Workings

Exchange traded funds either hold the underlying asset or they invest in derivative contracts. In a nutshell ETFs (Exchange-Traded Funds) allow you to access a basket of stocks selected by style (market capitalization), broader market/sector/industry, international markets (countries, regions, developed or emerging markets) as well as futures (commodities/currencies) and fixed income (bonds). ETFS are very transparent both in terms of fees but also on what the underlying investments are. These mini-funds are traded like individual stocks and have good levels of liquidity. You don't need to worry much about their trading volumes as an ETF is a synthetic instrument having highly liquid stocks of the specific market or sector. Also, ETFs reduce trading risks compared to individual stocks in terms of counterparty risk (as the money is held in a custodian account) and price variations as institutions can buy large chunks of ETFs without a heavy impact on price moves (like the one perceived in stocks).

Exchange traded funds allow investors to cheaply mirror the performance of an index and are currently booming, for instance only last year almost 300 new ETFs were launched and traded in different stock markets. Also, more and more specialized ETFs are coming into the market with some which are inversely related to the underlying index, the Short ETFs (designed to go up when their indexes that underlie the benchmarks go down and vice-versa); and the leveraged shorts, the UltraShort ETFs. This particular family of ETFs provides the opportunity to trade the downturns in markets without the inconvenience of short-selling due to margin account and margin call risks.

Short and Ultra-Short ETFs can be used to hedge a portfolio to neutralise the exposure when an investor doesn't want to sell off the positions. They can even be used by short-term traders looking to profit from market pullbacks or to ride a bear market.

It is interesting to note that ETFs can be included in an Individual Savings Account (Isa) or Self-Invested Personal Pension (Sipp) and are exempt from stamp duty.

Warning: ETFs are suitable for both new investors and sophisticated traders. However, leveraged and short ETFs are only suitable for advanced investors. Leveraged ETFs mean that losses are amplified if the market turns against you.

Q. Why are ETFs so popular in the USA with personal investors?

A: Exchange traded funds or ETFs originated in the 1990s in the United States as a simple way for traders and investors to diversify their risk. In their most simple form they are just a tradable index fund, designed to mirror the performance of a spread of stocks without the retail (or institutional) investor having to go to the trouble or expense of buying the full portfolio. They took off like a bushfire, partly because of their diversification and partly because of their low cost compared with managed funds, which are more active stock pickers but have a much higher cost structure.

In the United States, many people (ordinary citizens AND investment professionals) have a strong preference for ETFs rather than futures, CFDs, spreadbets, forex, or options. Some of the reasons include -:

  1. ETFs can be traded in a non-margin account. Lots of people are scared of margin, and the government prohibits trading on margin in some types of retirement accounts (IRAs, 401ks, pensions, etc). Most mutual funds, for example, proudly boast that they don't trade on margin, which reassures their customers.
  2. ETFs are traded just like stocks and you can do so at Charles Schwab or E-Trade or Fidelity or other brokers which are familiar and comfortable and non-threatening. You don't have to explain to your family and friends why you're doing something new and different at a weird brokerage that doesn't even advertise on TV.
  3. Because ETFs are perceived to be 'just like stocks' and because stocks are perceived to be less risky than forex or CFDs or spreadbets or futures or options, the fear of trading ETFs is far smaller than the fear of trading the others.
  4. Thanks to Inverse ETFs, you can profit when the price of something falls without going short. People are nervous about derivatives but they are scared to death of shorting.

These emotions are expressed by ordinary citizens AND by huge numbers of investment professionals; generally, those who invest in equities and have never tried more exotic vehicles, i.e .the vast majority.

Q. What is the difference between ETFs and ETCs?

A: Firstly, what is an ETF? An exchange-traded fund (aka as ETF) is an open-ended index fund listed and traded on a stock exchange, very much like a share. ETCs stands for Exchange Traded Commodities and are similar to Exchange Traded Funds except that they provide exposure to the commodity markets; both have relatively low commissions and no stamp duty is payable on purchases although there are dealing charges when you buy and sell, and an annual charge is included in the pricing. i.e. ETCs are the same as ETFs, but are based on commodities (currency exchange-traded funds are also referred as ETCs).

Both exchange traded funds (ETF) or exchange traded commodity (ETC) represent practical ways for gaining exposure to the price of gold or oil. These investment vehicles the price of gold or oil, either by holding the commodity directly or by using derivatives to replicate it, and are bought and sold like shares. Generally, ETFs are regarded as a more long-term investment than spread betting and CFDs.

Q. Are Exchange Traded Funds derivatives?

A: Exchange Traded Funds are open-ended investment funds, and do necessarily have to be derivatives. For instance a FTSE tracker Exchange Traded Fund (e.g. ISF) is not a derivative in the true sense of the word, since the actual securities are owned by the fund, and you are entitled to the shares (although taking this option is usually not practical for anyone except for a market maker).

Commodity ETFs consist mainly of funds that invest in derivatives. There are a few exceptions to this, such as some precious metal funds, where the actual metals are owned in allocated form by the fund, and the securities in the Exchange Traded Fund confer a certain entitlement to the metal - however, this isn't necessarily what your question is about.

The vast majority of ETCs work by investing in the futures market for the commodity at-hand. For instance in the case of oil, the fund will buy as many 'front month' futures contracts as it has available cash to cover (with or without leverage, depending on the fund's objective). Just before the contracts expire, the fund manager will sell the contracts, and purchase new contracts for the following month. Example. If I bought into such a fund now, the fund manager would purchase September 2009 oil contracts to the value of my investment. At the end of this month, the contracts would need to be delivered, so the fund manager would sell the September contracts (prior to the delivery date), and purchase October 2009 contracts. The end result is that the fund should track the price of the front month futures contract. The main point here is that these derivative based funds do not actually take delivery of the commodity - they are pure speculative products, that operate in the paper derivatives markets.

There are adaptation of funds which will invest in futures on different time-frames - example a 3 month fund would today buy the July 2009 future and then rolling it to the August 2009 future at the end of this month. Such a fund should track the price of the 3-month future contract, which isn't necessarily the same as the front month.

The problem starts when the market is in 'contango' - the opposite of backwardation. Contango means that the longer the future, the more expensive it becomes. In the case of oil, the level of contango was nearly 10% between the front month and the 2 month contract over the past months. This is a curse for these ETFs, as they end up taking a 10% hit when they rollover, due to this discrepancy in price - i.e. if they sell 10 front contracts, they only get sufficient cash to buy 9 of the following contract. This has become worse in recent months, as the recent fall in oil prices, has led to massive investments in these Exchange Traded Funds, especially those that invest in the front month and the result has been a massive enlargement of the contango, which gets dramatically worse as the funds try to rollover. In fact this has become so bad, that the biggest oil Exchange Traded Fund was being investigated because it was moving the market so much, and has suffered such bad roll-losses, that some observers have reported it as bordering on a ponzi scheme.

Due to the front month speculation being so heavy, this is one of the reasons that there are funds that invest at a different future time point. There tend to be less 'buy and hold' investors there, and the longer futures tend to respond slightly differently to news. There is definitely much less contango going forward, so the one-year or two-year funds would be a better 'buy and hold' type investment, than the front month, which is nothing more than pissing money away - unless there is a big run-up in the oil price (something that is actually quite unlikely to happen, because of the contango itself - the contango in practice means that it is cheaper to buy now and sell later - which in turn leads to massive amounts of oil going into storage, witness the huge numbers of oil tankers which were being parked at ports all over the world full of oil, just to try and profit from this. The result of massive stocks is a persistent downward pressure on prices).

So, the futures based funds will track the price of the relevant futures, subject to the rollover costs, management fees and interest charges. The fund manager will publish a daily 'net asset value' for the fund, which explains exactly how many barrels of oil, kilos of pigs, etc. a share in the fund is worth.

In the case of the physical funds (i.e. physical precious metals) - the funds track the spot price - because the funds actually invest in gold bars, which can be deposited or withdrawn from the vault in exchange for shares in the fund - as the metal is immediately available to hand, it's price is the 'spot' price, rather than a future price.

Q. How safe is an Exchange Traded Fund?

A: Answer by trading instructor Rory Gillen. I trust you are referring to ETF risks other than pricing. If this is the case the main risk is the counterparty risk i.e. the risks that the fund is exposed to outside your control.

To understand this, you first need to realise that exchange traded funds obtain their exposure to an index in one of two ways. They could either buy individual companies in the index or buy a derivative contract which in effect allows the tracker to replicate the performance of the index.

For a tracker fund that buys its own shares the counterparty risk doesn't exist as it directly owns the assets. The risk arises when an ETF buys derivative contracts which are dependent on a third party to deliver on that contract and which underlying positions are not disclosed. (which creates credit or counterparty risk - Hint: Bear Sterns, Lehman Brothers). Thus, some of the ETFs act like derivatives; great to hold when things move favourably but may end up worthless if the side that issued the derivative cannot honour its end of the bargain. Let's take the GLD ETF as an example; holding the GLD ETF is in many ways like holding Gold but it is not like owning gold bullion. In theory the GLD Trust should own around 860 tons presently but how can you validate this? In real terms GLD has no way of legally determining that the gold that is held in trust for it is actually held in a vault; it can be that the bank depository has already lent it out to a third party or the bank has given the gold to a third party custodian to keep the gold safe. And what happens if the bank that is leasing out your gold encounters financial difficulties? This is just an example but you get the idea and the case is probably similar for other ETFs and it is a good idea to inspect carefully the 'Prospectus' of an ETF. In the case of GLD it is probably ok for short-term trading but definitely not suitable for long term holding as it could become a disaster.

Having said that, it is important to point out that all exchange traded funds in the European Union (as opposed to US listed ETFs for instance) are required to keep counterparty risk to 10% or less of their assets. iShares ETFs have an internal rule that limits counterparty risk to just 5% and Deutsche Bank is eliminating counterparty risk altogether (I believe) from its exchange traded funds. I am not sure to the same extent about the specific rules governing US-listed ETFs on the counterparty risk issue but I'd be amazed if they were not similar.

Q. Are Exchange Traded Funds a good trading tool?

A: Exchange Traded Funds certainly make speculation very easy. They have zero entry/exit fees, microscopic spreads and great liquidity, so are ideal for this. The ETFs can go in an ISA where they can be kept free of CGT. For instance if speculating on gold, you can't do that if you owned the physical gold outright.

As an individual, trading an exchange traded fund does make sense if you wish to take a view on something that is replicated by someone else, whereby you don't have the time, skill, inclination to manage the futures rolls, or the replication of an index - eg; a building index. The drawback with ETFs is their annual fees (0.4% p.a. for gold, and 0.5% to 0.9% p.a. for others) which are however lower than the fees charged for an active fund (around 1.7%) or 1.03% for a bond fund. You'd get much lower annual fees from somewhere like bullionvault (but at the cost of high entry/exit fees).

If you're investing a modest amount, or you're going for a short or medium term investment then the ETFs make sense. If you're planning for the long haul (more than 3 years), and investing big money, then you should think about looking elsewhere.

Q. Why are ETFS often better than an actively managed fund?

A: Exchange Traded Funds are continuing to gain market acceptance and for good reason as they offer much lower fees than other investment products. Additionally, with an ETF you know what is in the basket, while the mix of an actively run fund could change at any time as fund managers decide to rebalance the portfolio by taking more or less credit risk or adjusting the duration of their holdings.

Active Traded Funds - are they Really Worth the Extra Cost?

Investment funds effectively mingle your monies with other people's and spread it round a wider number of companies than would be possible if you each investing alone. In theory this should reduce the overall risk but the disadvadvantage is that beyong choosing the fund and company you wish to do business with, you practically have no say in where you money goes. An independent company manages the fund to buy assets, generally stocks, with the objective of generating the best possible returns for you and your fellow investors.

Whilst most of us have invested money in a fund at some point (be it actively or passively managed) you might find it disturbing to know that study after study has demonstrated that about 70% of such funds fail to beat their index. When you consider that there are more than 5000 of such funds to choose from you will realise that this is more than a numbers game and that few funds are likely to beat the market benchmarks. Investing in the 'right funds' can bring very nice returns but this is akin to selecting 'good performing stocks' which is anything but simple to do.

Given such figures I find it very hard to justify a fund's high initial charges (given the performance delivered) which can be anything up to 5% (invest £20,000 and only £19000 goes to the fund). Some funds also carry an annual charge, of say 1% which may not sound too bad, but figures from Shares Magazine show that for an investor contributing £100 a month, and who averages a gross return of 7 per cent for 25 years, the total cost would amount to over £10,000, which reduces his total net investment by 15 per cent to £65,800.

Active funds will do a little better than passively managed funds but this is likely offset by their higher fees so it might make better sense to seek lower fees than expend effort in trying to find the better performing funds. The thing is that most retail investors fall into the trap of investing into such funds not realising that they are being taken advantage of.

ETFS solve all this - they do not impose high entry fees as trading them is very similar to trading a share. The other advantages of investing into exchange traded funds is that there's no stamp duty and if building an ETF portfolio it is very simple to diversify across a number of exchange traded funds with a mix of global assets. Ultimately, the main advantage of investing in ETFS is however their low fees - usually less than 0.5% per annum; compare that to a fund which would probably charge a minimum of 1.75% (with some charging an outrageous 3 to 4%).

While on the subject it is worth mentioning that my friends in the banking sector tell me that the key in the financial services retail is to cover all the different outcomes. To clarify - most banks are organised in a way that they have many business divisions and different funds. While one unit will make a prediction of a particular investment trend, another will make the exact opposite forecast. Between, this doesn't that the bank is defrauding you. On the contrary, the fund managers and analysts who make these predictions fully stake their reputation on them. The problem is there is such a diverse set of opinions that all outcomes would have been covered anyway.

So what happens at the end of the financial year? The bank highlights out the forecasts that were spot on while cleverly forgetting about those that went wrong. What about clients in the funds that didn't perform? That's the job of the fund manager - in a word 'justify'. A fund manager I know once cracked the joke with me that only 20% of his time is spent on portfolio management while the remaining 80% is spent explaining to clients why things did not work out the way they had anticipated it to. This gives the impression that the bank or institution) knows what it is doing. But honestly, I think they are probably as lost as we all are.

You have to remember that not everyone can beat the market, because the investors that are trying to beat the market are making the market. It's a mathematically impossibility that everyone beats the market. Now factor in the costs (transaction costs, management fees, etc) and you'll have a large bunch of funds that fail to beat the index. They (the managers) are winning the money they (you!) lose through fees.

Q. What sort of rough percentage profit would a good fund manager achieve as an average?

A: You have to worry about 2 dimensions:

* How does the fund manager perform compared to his/her peer group.
* What maximum drawdown do they suffer in bad years.

They are two parallel universes - relative and absolute performance.

Whatever you do be wary of jumping on the bandwagon and investing in last year's best performer, this is quite misleading as funds are like fashion and the last thing you want to be doing is to be caught wearing last season's look especially when you paid full price for the privilege.

Q. What about those funds promising to preserve your capital should the stock market drop?

A: Structured products tend to be marketed as a win-win proposition with some funds claiming to offer exposure to a rising stock market plus a promise to preserve your capital should the stock market drop; so it may not come as a surprise that such products have found popularity with investors.

But are such funds really that good an investment?

I don't know of many people who have made money from such funds ; typically there is not only a lack of clarity on costs but there are also several hidden buyer bewares. To start with such funds will usually only return the original sum back if in say, 5 years' time the market happens to be lower (that's a zero return for five years of investing with no dividends) and your investment is only as secure as the bank providing the guarantee. Don't think the bank will go bust? Ask that to the 5,600 British retail investors who found that they had lost more than £100 million on structured products backed by Lehman Brothers... The fact that such products have a fixed lifetime date means that when they mature, even if it is a bad time to sell, you still have to...

Q. I have been looking at Index Trackers in the UK and in Ireland...


In the UK the cheapest trackers identified by Motley Fool are: Db x-trackers FTSE 100 ETF(XUKX) (TER 0.30%, fund is ETF)
Lyxor ETF FTSE 100 (L100) (TER 0.30%, fund is ETF)
Liontrust Top 100 (TER 0.38% fund is UT/OEIC)
iShares FTSE 100 (LSE: ISF) (TER 0.40%, fund is ETF)
Prudential UK Index Tracker (TER 0.50%, fund is UT/OEIC)

- is there somewhere that I can view TER comparisons for trackers open to Irish Residents?
- do any Irish funds come close to these low costs?
- what are the implications of investing in a UK based tracker (FTSE for example) as an Irish resident and what are the tax implications?

A: Answer by trading instructor Rory Gillen I would answer your questions as follows;

First you need to differentiate between index trackers that are listed on the stockmarket (which are exchange traded funds) and trackers which are not listed like the Liontrust and Prudential ones you outlined above. This is because you can obtain information on listed tracker funds much more readily than for the non-listed ones. Also, you can hold a number of different exchange traded funds in the same stock broking account whereas when you start buying non-listed funds you may have to deal individually with the Prudential and Liontrust. Having said that I'm aware that in the United Kingdom non-listed funds may be available through platforms where you can buy and sell a variety of funds through that single platform. You would have to open a different account with one of those platform operators. Not very convenient in my view.

Exchange traded funds product information is accessible at the relevant issuers websites and contain much detailed data you may need like the TER, stock holdings, details of dividend payments...etc. Just type Lyxor ETFS or iShares ETFs or db x-trackers ETFs into google and the relevant web site should come up.

Some of the fund manager based in Ireland also offer tracker funds. They are non-listed funds so you would need to deal through an intermediary and thus it is best to check his or the fund manager's charges. It is not easy for the Irish-based trackers to compete with exchange traded funds, as far as cost are concerned.

As an Irish resident, the tax implications of buying a UK tracker fund (exchange traded fund or otherwise) are identical to buying into one based in Ireland. There are a few minor exceptions but you should be fine with tracker funds listed on any of the developed markets like the United Kingdom, Europe, United States...etc.

Q. I bought some ETF's recently and noticed I did not have to pay stamp duty ON them as you normally do with other stocks and shares?


Does this mean that Exchange Traded Funds are also taxed differently? Are the gains exempt for the first 9K or so, as per capital gains tax?

A: There is no stamp duty when buying foreign companies (including offshore companies incorporated in the Channel islands, Ireland...etc) - the same exemption applies to buying into Exchange Traded Funds. There is no stamp duty to pay when you buy units of the Exchange Traded Fund.

However, the Exchange Traded Funds will have to pay the stamp duty on any purchases they make. So if you buy a FTSE tracker, then whenever the fund creates more Exchange Traded Funds shares by buying shares in Tesco, BG,...etc. then stamp duty will be charged on those purchases, the money coming from the fund's 'management fee'.

Sales of Exchange Traded Funds shares are taxed in the same way as other shares - you pay CGT on any profit you make, after your annual allowance, and any allowable capital losses. Dividend income from ETFs, again is the same, it is taxed as dividend income (which, is for practical purposes, the same as other forms income).

When held in an ISA, there are no tax liabilities, and no tax allowances - so a capital loss on an ISA, cannot be used to offset capital gains outside the ISA.

Q. Assuming a sustained rally in the US is coming, what's the best vehicle (with least fees) for a UK investor to get in to the S&P 500...etc?

A: Easiest is to use one of the exchange traded funds:

IUSA - tracks the S&P 500.
XSPS - short S&P 500. .
Unfortunately, S&P 500 is the only index available with London traded tracker ETFs.

If you can access the United States markets through your broker, then you've got a whole heap of funds to choose from:

S&P 500 - Standard SPY, Leverage x2 SSO, Short SH, Short x2 SDS
Dow - Standard DIA, Leverage x2 DDM, Short DOG, Short x2, DXD
Nasdaq - Standard QQQQ, Leverage x2 QLD, Short PSQ, Short x2 QID
Russell 2000 - Standard IWM, Leverage x2 UWM, Leverage x3 TNA, Short RWM, Short x2 TWM, Short x3 TZA

A word of caution with these, the leveraged and short ETFs get eaten alive by volatility (due to the way they work, a daily price change in the underlying index must be matched by a buy high, sell low type maneouvre - if the price keeps going up and down, these funds get their value eroded. The higher the leverage the worse it gets. Standard short funds have done OK, but the x2 shorts or x2 longs have got badly hurt in the last few months. The 3x have only been around a week or so - simulations of their performance suggest that they will suffer much worse than the x2 ones.

There are London traded warrants available on all the major indexes, in both call and put types. They are underwritten via Societe Generale and tradeable via select brokers. Unlike US options, they are very simple to trade, come in small denominations and must cash settle on day of expiration (European expiry). These make them much more suitable for inexperienced traders than directly trading US options, which have a number of important gotchas. However, options with long expiries have high costs + there are significant market spreads and commissions.

Finally, you have spread betting. There are advantages and disadvantages here.

There are a number of other factors to consider when it comes to safety. Should you decide to use one of the standard Exchange Traded Funds listed above (IUSA, or one of the standard US based ones) then the ETF company is basically a holding company which holds the appropriate securities and does not lend them out for short selling. If it goes bust, the shares are held separately in a client account, and you are entitled to your share of teh fund. They are therefore very safe.

The enhanced (geared, and short ETFs) use derivatives to obtain their enhanced returns - the Exchange Traded Fund company has private over-the-counter derivative agreements with various banks. There is theoretically a risk of counterparty failure which may halt trading of the fund, or even cause finacial loss to the fund. This happened to some London traded commodity ETFs, which worked via derivatives supplied by AIG. When AIG looked like it was going to collapse, the funds stopped trading, and they could have been total losses if AIG hadn't been bailed out. Similarly, warrants are dependent upon the solvency of Soc Gen. If they fail, your warrants are worthless. Same with spread bets.

If you must use derivatives, then United States traded options or futures contracts are possible, as these are exchange cleared and therefore have negligible counterparty risk. However, these are the big boys' toys - and you need to want to bet big, if you want to use these.

Q. Why should you be careful in investing in ETFs when the Pound is rising versus the Dollar?

A: Suppose the current exchange rate is £1 = $1 and your ETF (say PHAU) is worth $100 when you buy it. You pay £100. If the $ rises by 10% against the £ and the ETF stays at $100 you get back 90p when you sell. So you need the ETF to rise by 10% just to cover currency fluctuations. Of course it could work in your favour as well as against you. Had you purchased a PHAU ETF about 2 years ago you would have paid about £45. It is now worth about £82 (+80%). If you had put on a rolling spreadbet at the same time at around $90, it would only be worth $118 now (+35%).

So most of your gains were from currency exposure not the rising gold price. This can work both for or against you depending on how long you are intending to hold and where you see the currency exchange going. If you want to avoid currency risk just spreadbet the $ pips.

Q. Is there an advantage in using GLD (an exchange traded fund) for example over a spreadbet on gold future?


I understand their use for targeting sectors but are they as relevant in the UK where we can spreadbet indices/commodities. Case in point: SPDR Gold Trust (ETF) - Rich

A: Rich - no advantage in using an exchange traded fund over a spreadbet unless you want to take a long term view. For instance if you believe now is a good time to buy crude oil with an idea that it will outperform equities over a ten year period or to own it as part of a balanced portfolio then an exchange traded fund would be the product to use. If crude gets back to its previous high you get a return of return of over 200% profit. 200% (if it comes off) is a good deal even if you have to wait 10-15 years. Could even be a hedge against rising inflation post recession.

Another consideration is that profits from spread betting are tax-free. Let's assume you invest £25,000 in a FTSE 100 exchange traded fund and the index rallies over the next 5 months or so. Say your profit is about £4,400 - however you may very well be liable to pay capital gains tax at 18% on the £4,400. This is not so with spread betting where the profit would not incur capital gains tax. The downside of this is that if you lose money on the spread bet, you won't be able to write it off against other gains on your tax return. Also, to run a FTSE 100 position worth £25,000 using an ETC, you will have to deposit over £25,000 to your broker. Using a spread bet would tie up only a fraction of this - which can be as little as £2,500.

Q. How does spread betting compare to trading ETFs?


I understand their use for targeting sectors but are they as relevant in the UK where we can spreadbet indices/commodities. Case in point: SPDR Gold Trust (ETF) - Rich

A: First of all let me emphasise that financial spread bets and ETFs are different instruments.

Spread betting as a trading tool is fine, as with all trading there are costs, but for example just a few minutes ago there was a long on DOW at 12020,so you'd pay 12021 and close out for 30 ticks taking a 1 tick haircut at that end-say it was £5 a point, that's £150 profit minus £5 each end- I think most people would find that acceptable.

On the other hand the spread betting spreads I've seen on US indices are at least 3 times the ones on corresponding ETFs, plus you don't get to be on the right side of the spread with a limit order. So it's like paying a multiple for something that costs 10 quid elsewhere.

Of course when buying and selling exchange traded funds there are also broker charges and there are the annual ETF charges to consider as well as the spread. For an index spreadbet there is only the spread and if you allow it to go to expiry only half the spread. Financing costs is a bit of a red herring as this is in the price (e.g. if you buy June FTSE 100 currently you do so for a discount to cash)

Let's look at future spread bets. June FTSE is currently quoted 5805-11 which is a small discount to cash. If you buy this then the only requirement is to deposit about 10% of the underlying with the spread betting provider upon which you will get no interest currently. The rest of your money you can invest as cash and get whatever prevailing rates are, maybe a couple of percent or so. This rate plus the discount to cash on the future will more or less compensate the lack of dividends you get with the ETF.

There's another big advantage at the other end of the scale though and that's capital gains tax exemption for spread bets. So if you had, say, £500,000 that you wanted equity exposure with back in spring 2009 with a view to getting out if FTSE hit 5000 then you would have been hit for a massive CGT bill via the ETF route but zero via a spread bet.

For smaller stakes spread betting wins hand down especially if you like to trade 50p a pip - even Meta trader based spot trading means you will take a haircut in some way. Not saying spreadbets are cheaper, they're not, but you need to consider all costs for different approaches.

Q. Spread betting iShares ETFs?


I would like to use spreadbet or CFD (preferably spreadbet) as a short term hedging instrument for some of the bigger long positions I hold in ETF - most notably the iShares ETF.

A: City Index covers some iShares ETFs - there isn't so much a list of the EFTs on offer but if you call up the dealers and ask for a certain one they will look to creating a market for it.

Q. Can you give me the name of an ETF that tracks physical silver?

A: I follow ETF SECURITIES: ETFS Physical Silver which is quoted in London and denominated in both dollars and pounds - quoted as PHAG/L (US$) and PHSP/L (GBP) respectively.

Q. I'd like to ask whether it is possible to bet on the Sensex (India) or India 50 and Russian indices?

A: Don't think anyone will do the Sensex or Russia but some like IG Index and Capital Spreads offer the India 50 which is based on the Nifty contract, which is the NSE index. Sensex is based on the Bombay Stock Exchange Index. The futures 'trade' on the U.S. Futures Exchange, but the volume is absolutely appalling (roughly zero!). If no spread betting provider can hedge the underlying exposure they won't quote. Russia is similar; although perhaps not as bad - the futures are not easy to trade, so I doubt anyone will touch it. There used to be the RTX index in Austria, based on Russian stocks, which IG Index quoted, but I think they've stopped quoting it. If any spreadbet company does these it is likely to be IG though- they certainly cover more markets than most.

Q. How to I get exposure to Brazil?

A: Credit to Vince Stanzione. Brazil has a stable government and is rich in oil with the state owning the majority of PetroBras (NYSE: PBR) which controls the Tupi oilfield, one of the largest new oil discoveries in recent years. Other Brazilian resource companies worth considering include mining giant Companhia Vale Rio Doce (RIO) which is a leader in Copper, Steel, Coal, Potassium and Nickel. Steel producer Gerdau (GGB) and sugar/ethanol producer Cosan (CZZ) should all benefit from the rise in commodity prices in the coming years.

You could always buy a spread bet on the iShares Brazil Exchange Traded Fund (IBZL) in London or (EWZ) in the US which closely follows the movements of the main Bovespa Index and has 72 Brazilian companies within it (although this is heaviliy weighted to Materials and Energy with PetroBras making up 25% of the Index). And of course you could always open individual spread bet positions on the individual companies I've mentioned many of which have a USA listing. Other ways to trade include covered warrants offered by RBS Markets and Lyxor offers an Exchange Traded fund listed in the UK (LBRZ).

 ...When to go Long: Adding to Winning positions and cutting from Losing Positions


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