Download What is an Exchange Traded Fund? How are ETFs bought and sold

FTSE EXCHANGE TRADED FUNDS AND INDICES FAQ
What is an Exchange Traded Fund?
An Exchange Traded Fund (ETF) is a regulated investment product that trades intra-day on
exchanges like London Stock Exchange. ETFs typically seek to track the performance of an index
like the FTSE 100.
How are ETFs bought and sold?
Like regular shares, ETFs can be bought and sold throughout the trading day via traditional stock
brokers and online share dealing platforms.
Are indices and ETFs the same thing?
No, an index is simply an informational tool which describes the performance of an asset class or
financial market- they cannot be directly invested in and an investor cannot gain market
exposure from an index provider like FTSE. An investor can gain exposure to the performance of
an index by investing in index-tracking financial products, such as ETFs. These products are not
provided by FTSE, but instead are offered to the market by the ‘fund issuer’, ‘product issuer’ or
‘product sponsor’ – normally a regulated investment firm or bank.
Why is the index important when considering ETFs?
As the goal of an ETF is to deliver the performance of the index to an investor, the market the
index measures, the way the index rules are applied, the quality of the calculation, the weighting
approach, currency denomination and the index providers approach to issues such as country or
industry classification can have a significant impact. Simply put, the index ground rules
determine the composition of the index which in turn determines the ETF exposure.
What are the qualities of a good index?
An index is a group of securities chosen to track a particular theme: a market, asset class,
industry sector or factor. As such, a good index provides the most accurate reflection of the
chosen theme. It is important that an index is transparent and rules-based, with rules freely
available - this means everyone can understand the objective of the index, the securities it will
track and how it will be reviewed and managed. Finally, it is important to make sure that the
index is well governed and that the index provider has instituted checks and balances to make
sure that the rules are followed and any changes to the index are made objectively and fairly.
How does an ETF Issuer replicate an index?
There are three main ways in which an issuer will replicate an index; we’ll use the FTSE 100 as
FTSE and ETFs
FTSE calculates a comprehensive range
of indices covering all major asset
classes, geographical markets and
weighting approaches.
We are the world’s third largest ETF
index provider by tracking AUM.
9 of the top 10 largest ETF issuers
choose FTSE, and our indices underpin
many of the world’s largest and most
widely traded ETFs.
Worldwide, over 300 ETFs tracking FTSE
indices are available from over 40 ETF
issuers.
We are the leading provider of indices
for Emerging Market, China, Real Estate
and Alternatively Weighted ETFs.
We maintain and manage independent
industry and country classification
systems which are embedded into
capital market workflows, exchanges
and financial products across the globe.
As part of London Stock Exchange
Group, FTSE sits at the heart of
Europe’s most liquid and diverse ETF
marketplace.
an example:
1. Full replication: Buying all 100 stocks contained in the FTSE 100 in the same
proportions that they are weighted in the index
2. Partial replication / Sampling: An issuer will buy a sub-set of the 100 stocks which it
considers are representative and highly correlated to the performance of the index overall
– normally used when replicating very large indices, or as a way the issuer considers it
can reduce trading costs
3. Synthetic replication: The issuer will buy a swap from a swap provider who agrees to
deliver back the performance of the FTSE 100 to the issuer.
Learn More
To find out more about FTSE and ETFs
please email us at [email protected]
www.ftse.com
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Exchange Traded Funds and Indices FAQ
What types of exposures are available via ETFs?
There are now over 3,000 ETFs listed on exchanges around the world, providing exposure to almost every major asset class – equities, fixed income,
real estate and commodities as well as ‘alternatively weighted’ approaches. Within these asset classes, there are a wide variety of sub exposures such
as geographic regions, single countries, industry sectors and market types. ETFs can provide either very broad, or more targeted, niche exposures. A
full list of the ETFs tracking FTSE indices can be found at FTSE’s ETF portal: www.FTSE.com/ETFs
What information and resources are available from FTSE?
FTSE provides a high degree of transparency into the indices which underpin ETFs in order that all market participants can understand the index rules
and learn how FTSE will manage reviews and changes. Ground rules, data and factsheets for all of our standard indices are available on our website.
We also provide regular research, analytical tools and commentary to give further insight into markets and asset classes covered by FTSE indices, all of
which are available at FTSE.com. Finally, a variety of educational and data tools specific to ETFs are available at www.FTSE.com/ETFs
For further information visit www.ftse.com,
email [email protected] or call your local FTSE
office:
“FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited (“FTSE”) under licence. All information is
provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability
can be accepted by FTSE or its licensors for any errors or for any loss from use of this publication. Neither FTSE nor any of its licensors makes any claim,
prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of any FTSE index or the fitness
or suitability of the Index for any particular purpose to which it might be put. FTSE does not provide investment advice and nothing in this communication
should be taken as constituting financial or investment advice. FTSE makes no representation regarding the advisability of investing in any asset. A decision to
invest in any such asset should not be made in reliance on any information herein. Indices cannot be invested in directly. Inclusion of an asset in an index is
not a recommendation to buy, sell or hold that asset. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of FTSE. Distribution of FTSE index values and
the use of FTSE indices to create financial products requires a licence with FTSE and/or its licensors.
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