GUIDE TO ETFS

AND ETCS
Exchange Traded Funds (ETFs) and Exchange
Traded Commodities/Currencies (ETCs)

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 WELCOME
Exchange Traded Funds (ETFs) and Exchange
Traded Commodities/Currencies (ETCs) are a
popular and low-cost way to invest. They mix
two of the key benefits of investing in funds
and shares.
Like a fund, they invest in a range of
investments or track an index. But because You should only invest in ETFs and
they’re traded on the stock market, like a ETCs if you have the knowledge,
share, you can buy and sell at any point in time and understand the higher risks
the trading day. of these type of exchange traded
investments. We do not provide
Exchange Traded Funds (ETFs) personal advice on these. If you’re
ETFs aim to track the performance of a unsure if these are right for you or
basket of investments or a stock market where to invest, seek advice.
IMPORTANT INFORMATION index, like the FTSE 100 or S&P 500, or a
This guide is to help you learn about ETFs and ETCs, but it isn’t personal advice. If you’re not bond index.
sure whether an investment is right for you, please speak to a financial adviser. The value of
all investments and any income they pay can fall as well as rise, so you could get back less Exchange Traded Commodities/
than you invest. Past performance is not a guide to the future. Currencies (ETCs) aim to follow the price
of metals, oil, agricultural products or
Some ETFs and ETCs are difficult to understand and are high risk. For your protection, currency exchange rates.
regulations restrict who can invest in them. If you open an account with us, we may ask
you to complete a form before dealing to show you’re aware of the risks. Please read each While they may look simple, they’re not
product’s Key Investor Information Document too. suitable for everyone.
Some ETFs and ETCs are domiciled outside of the UK and therefore will not be covered by
the Financial Services Compensation Scheme (FSCS). Make sure you check how an individual
ETF or ETC is protected by a compensation scheme before investing.
Remember tax rules change and benefits depend on individual circumstances.
This guide is issued by Hargreaves Lansdown Asset Management Ltd, One College Square
South, Anchor Road, Bristol, BS1 5HL, authorised and regulated by the Financial Conduct
Authority. All information is correct at 13 March 2023.

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HOW DO THEY WORK?
Exchange Traded Funds (ETFs)
There are three main ways ETFs work.
Fully-replicated ETFs – hold every
investment, in proportion, within the index
they track. For example, if a company made
up 4% of the index, 4% of the ETF’s holdings
would be shares in that company.
Partially-replicated ETFs – don’t hold every
investment in the index they track.
Instead the ETF will hold a selection of
investments designed to closely match
the performance of the index. This is also
called “optimisation” or “sampling”.
Swap-based ETFs – don’t hold any
investments in the index they track.
Instead, the ETF will take out a contract known
as a swap with an investment bank which
agrees to match the return of the index.
Swap-based ETFs are higher risk than those
holding the investments directly. Many are
only designed for investors to hold for a very
short period of time. Over longer periods the
performance of a swap-based ETF will not
always match that of the index it tracks.
There is a risk the swap provider can’t deliver
on the contract. Which could mean ETF could
lose money or cease trading either temporarily
or forever. This is known as counterparty risk.
As a way to reduce this risk, the ETF will hold
collateral – stocks, bonds or cash unrelated to
the index but of equal value to the ETF. It would
use this collateral as cover if the swap provider
were to run into financial difficulties.
Exchange Traded Commodities/
Currencies (ETCs)
There are two main ways ETCs track a
commodity or currency.
Physical ETCs – these buy and store the
commodity in vaults or warehouses. This is
common in precious metals like gold or silver.
Synthetic ETCs – in some cases buying and
storing a commodity is difficult or impractical.
For example, wheat and similar commodities
which perish over time. Or, with a currency
ETC, holding large sums of money in a
different currency with a bank.
So instead, a Synthetic ETC will agree to
purchase or sell a certain amount of a
commodity or currency at a fixed price or
rate at a time in the future. If the exchange
rate or commodity price changes, the value
of the contract will too. This is known as a
futures derivative.
As the end of one contract approaches, the
ETC will then start another and keep going.
Synthetic ETCs are higher risk investments.
Many are only designed for investors to hold
for a very short period of time. Over longer
periods the performance of a synthetic ETC
will not always match that of the commodity
or currency it tracks. As such, they’re only
suitable for people with a high level of
knowledge and experience.
You can find out how an ETF or ETC works
in its prospectus. These are on the ‘at a
glance tab’ of the ETF or ETC you’re
interested in on our website.
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 THEY’RE TYPICALLY LOW COST
ETFs and ETCs usually track an index or
commodity so they don’t need to pay for
research or fund managers. This helps keep
costs down, and means they usually have
a low ongoing charge figure.
WHY DO
You can find out an ETF or ETC charges on
the ‘at a glance tab’ of the ETF or ETC you’re
interested in on our website.
Also, unlike shares, there’s no stamp duty
when you buy an ETF. But you will pay up to
£11.95 per deal to buy and sell online with HL.
INVESTORS
There’s no charge from HL for holding an ETF
or ETC in the HL Fund and Share Account or
HL Junior ISA. The annual charge to hold them
in a Lifetime ISA is 0.25%, and in a SIPP or ISA
it’s 0.45% (capped at £45 in the ISA and LISA,
£200 in the SIPP).
EASE AND SPEED
USE ETFS
As ETFs have many underlying investments,
you could use them to build a diversified
portfolio of stocks without having to buy
lots of different investments and pay the
dealing commission for each trade.
You also can buy and sell units in an ETF or
OR ETCS?
ETC when the stock exchange is open.
Meaning there’s lots of time to place a
trade during the day
You’ll be given a live quote when placing a deal
and know the price you’ll get if you confirm it.
Or you can set up limit orders or stop losses to
trigger a sale at a price you determine.
This is unlike other funds like OEICs and Unit
Trusts that price once daily. And you can’t
know the price in advance of requesting a
purchase or sale.
THEY WIDEN ACCESS TO INVESTMENTS
Sometimes there are investments you can’t
hold with a broker like HL, which you might be
able to gain exposure to with an ETF or ETC.
This could include shares or bonds that are
traded outside of the UK, US and Europe.
Also, there’s commodity trading. If you bought
a commodity directly, it could be difficult to
store it and sell it on. Most people don’t have a
vault to store bullion or a warehouse to store
oil barrels in their homes. You also wouldn’t
want a shipment of livestock or wheat arriving
at your door.
Traditional funds often don’t purchase these
commodities directly. But an ETC can allow
you to gain exposure to them.
It does this by buying an asset like gold
and holding the bullion in a vault. Or by
using derivatives.
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 And you can also hold some ETFs and ETCs in
an ISA or SIPP and take advantage of their tax
efficiency, if they meet your financial needs.
You can’t hold a commodity itself in an ISA, and
while some SIPPs allow you to hold physical
gold bullion, many including the HL SIPP don’t
offer this service.
If you’re looking to invest in some more niche
things, an ETF or ETC might be the only option.
KEY TERMS YOU MAY ENCOUNTER WHEN
LOOKING AT ETFS AND ETCS
Currency hedging – this involves using
derivatives to try and minimise the effect of
exchange rate fluctuations. This can protect
or harm the performance of an ETF or ETC
depending on currency movements. Currency
hedging normally comes with an additional cost.
Derivatives – a contract between two or
more parties which depends on an underlying
asset or benchmark. They can be used by
ETFs and ETCs to hedge, speculate on the
price movement of an asset, or ‘short’ or
‘leverage’ a position. It’s worth knowing that if
a counterparty providing a derivative contract
were to run into financial difficulties, there is a
chance that the ETF or ETC could lose money,
cease trading temporarily or be wound
up altogether.
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Distributing – the ETF will pay any income
or dividends from holdings to holders. Some
funds accumulate income and increase the
price of the units accordingly rather than
paying it out.
ETN – Exchange Traded Note. Often issued by
an investment bank to track an index or asset
that other ETFs can’t. They usually promise
to provide the same return as an index less
charges. Some are backed by assets and some
aren’t. They are generally complex investments
only suitable for knowledgeable investors.
ETP – Exchange Traded Product. This term
is often used as a catch-all for ETFs, ETCs
and ETNs.
Leverage – Leveraged ETFs and ETCs aim to
return a multiple of the index they track.
For example, a 2x leveraged FTSE 100 ETF
aims to return double the performance of the
FTSE 100.
Leveraged ETFs and ETCs are normally
intended to be held for a short period of time,
often just one day. If held longer than this
your returns can vary significantly from what
you may expect. Leveraged investments are
high risk, complicated investments and only
suitable for very knowledgeable investors.
Ongoing Charge Figure (OCF) – the ongoing
cost for holding an ETF. This is sometimes
referred to as the Total Expense Ratio (TER).
This will include any fees and costs that
the ETF incurs. You can find the cost of an
investment on the ETF or ETC’s factsheet on
our website. You can also find more details
in the product’s Key Investor Information
Document. Any HL platform fee will be
applied on top of this.
Shorting – ETFs and ETCs an investor can
purchase in the belief the index or commodity
being tracked will decrease in value. Short
ETFs and ETCs are complex investments
only suitable for knowledgeable investors.
And they’re often intended to only be held
for one day. While being able to profit on both
the market’s ups and downs might sound
appealing, it’s a high-risk strategy and most
investors should stay clear.
Traditional funds often
don’t purchase these
commodities directly.
But an ETC can allow you
to gain exposure to them.
Stock lending – many ETFs lend stock to a
third party in exchange for a fee. This can help
reduce the ETF’s costs. Throughout the loan,
the ETF remains the beneficial owner of the
shares, is entitled to all dividends and has the
right to recall the stock at any stage. The ETF
is normally given collateral (often cash or a
different stock) to hold while the stock is on
loan, but there is a chance that the ETF could
lose money if the loan can’t be recovered. In
this case, the collateral will be used to refund
the ETF.
Tracking error – this is a measure of how
closely ETFs and ETCs track the index they’re
following. ETFs and ETCs are unlikely to exactly
match the index they track, due to charges and
how they track the index.
UCITS – a set of voluntary rules which many
ETFs follow. UCITS ETFs must follow minimum
standards – that includes holding a diversified
portfolio, publishing clear guidance on their
charges and taking steps to safeguard
investors’ money. ETCs, and US-listed
products aren’t UCITS eligible. UCITS products
are not necessarily safer, and non-UCITS
products are not necessarily riskier. But if a
product is not UCITS compliant you should
take extra care. As always, it’s important
to read and understand the Key Investor
Information Documents.
NEED MORE INFORMATION?
Our knowledge centre has more information
on ETFs and ETCs so you can learn more
before deciding to invest.

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THROUGH HL?
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ETFs and ETCs. You can search for them on
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WHAT ARE THE CHARGES TO INVEST IN

ETFS AND ETCS WITH HL?
Dealing commission via HL is a maximum of
£11.95 per online trade.

There’s no charge for holding an ETF or ETC in

our Fund and Share Account or Junior ISA. The
the annual charge to hold them in a Lifetime
ISA is 0.25% and in a SIPP or ISA it’s 0.45%
(capped at £45 in the ISA and LISA, £200 in
the SIPP).

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 BUY ETFS AND ETCS IN
A FEW SIMPLE STEPS
Ready to invest?
The good news is that it’s much easier than Some ETFs and ETCs are complex and higher
you might think. risk, so rules restrict who can invest in them.
Once you’ve opened an account with us, you
If you don’t have a share dealing account, you may need to complete a form before dealing
could open one online today in minutes. to prove you’re aware of the risks involved.

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Then when it’s open and you want to
trade simply:

1. Log in to your account

2. Select the investment you wish to buy
3. Get a live price and buy, or set a limit order

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 Hargreaves Lansdown 0117 900 9000
One College Square South info@hl.co.uk
Anchor Road Bristol BS1 5HL www.hl.co.uk

Issued by Hargreaves Lansdown Asset Management.

0323 Authorised and regulated by the Financial Conduct Authority.
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