Exchange Trades Funds in the United Kingdom – Special focus on iShares Core FTSE 100 UCITS ETF

Exchange Trades Funds in the United Kingdom – Special focus on iShares Core FTSE 100 UCITS ETF

Exchange Traded Fund (ETF) is an investment fund that has both the characteristics of a mutual fund as well as a stock. While this fund pool has been created to benefit from stock market investments, the fund-raising protocol is closer to that of an equity issue and the units of the fund are traded in a stock exchange like the stocks of any other company. Unlike mutual funds, these funds have the advantage of less regulation and give more flexibility in the hands of the fund manager to deploy strategies which can give superior returns compared to a mutual fund. The performance of an Exchange Traded Fund is often measured in comparison to a popular stock index; however, it is nowhere similar to a passively managed Index fund. ETFs are actively managed and other than stocks may include bonds and commodities with an embedded arbitrage mechanism, to keep the Net Asset Value (NAV) of the fund as close to that of the chosen index for performance measurement as possible. However, while index funds try to mimic the performance of the Index, ETFs try to beat the performance of the benchmark Index.

Exchange Traded Funds (ETFs) are actively managed in the sense that they actively churn the portfolio with the objective of extracting higher performance from the fund, unlike a passive fund which tries to effect less churning in order to minimize the operating cost of the portfolio. Among the other benefits that are offered by ETFs are Diversification- An ETF provides the benefit of diversification across a class of assets that may not be offered by a mutual fund. Lower Costs – Because ETFs are pooled investment vehicles, they provide benefits of economic of scale in terms of brokerage cost and other related expenditure, which may be associated with direct investment in stocks by investors. Professional Fund Management – Exchange traded funds due to their sheer size are able to employ professional fund managers and use advanced computing and analytical tools in the fund management process, which an induvial investor by himself would not be able to employ should he directly invest in equities. High Liquidity – Since the units of these funds trade like shares on an exchange they provide immediate liquidity to the investors. Tax Advantage – The biggest benefit offered by Exchange traded funds is perhaps in the form of tax breaks; capital gains tax on an ETF is incurred  by the investor only upon the sale of the ETF , whereas mutual transfers capital gains taxes to investors through the lifecycle of the investment whenever stocks are bought and sold by the fund manager. In short, capital gains taxes are payable only upon sales of the ETF and therefore overall taxes are lower than that of mutual funds.

Exchange traded Funds (ETFs) can be of multiple types based on the type of the underlying asset and the different styles and strategies being adopted by the fund manager; Some of the most common types of ETFs are Indexed ETFs, Stock ETFs, Bond ETFs, Commodity ETFs, Currency ETFs, Leveraged ETFs and inverse ETFs

ETFs situation in United Kingdom.

In the United Kingdom there are currently nineteen ETFs in operation, which are linked to the three major United Kingdom Stock indices. Twelve funds are linked to the FTSE 100 index, three ETFs are linked to the FTSE All Share index and four ETFs are linked to the MSCI UK index. Of these nineteen ETF’s eleven employ full replication of index portfolio strategy, three use Optimized Sampling Strategy and five use Unfunded Swap portfolio strategy. Of these funds the largest is the iShares Core FTSE 100 UCITS ETF (Distributing) fund having a fund size of £ 8.105 billion, followed by the Vanguard FTSE 100 UCITS ETF (Distributing) which is having a fund size of £ 2.727 billion, followed by UBS ETF (LU) MSCI UK UCITS ETF (GBP) (Accumulating) -having a fund size of £ 1.48 billion. Interestingly all the above three funds employ the full replication of index as the portfolio strategy. The calculation of the fund size has been done as per closing NAV values as on 31 October 2019.

Other than these headline index linked funds, there are other ETFs also in operation in the United Kingdom which use a variety of alternative indices to measure their performances, while employing strategies that are different form those employed by the headline index linked funds.

iShares Core FTSE 100 UCITS ETF (Distributing) Fund

This fund is the largest ETF operating in the United Kingdom. The size of the fund as on 31 October 2019 was £ 8.105 billion employing the full replication of FTSE 100 index as the portfolio strategy and opting to distribute its earnings to the Investors instead of reinvesting.

The fund is constituted by iShares Plc, and was launched on 27 April 2000. The fund has a mandate to invest in all equity class of assets and distributes its income to its investors on a quarterly basis. The Administrator of the fund is State Street Fund Services (Ireland) Limited, its fund managers being BlackRock Asset Management Ireland Limited while its custodians being State Street Custodial Services (Ireland) Limited. The fund has an ISIN of IE0005042456 and is linked to the FTSE 100 Index.

The calendar year returns of the fund for the past five years were; for 2014 the total returns generated by the fund was 0.33 per cent, for 2015 it generated total returns of – 1.45 per cent, for 2016 it generated total returns of 19.03 per cent, for 2017 it generated total returns of 11.94 per cent and for 2018 it generated total returns of -8.83 per cent.

 The benchmark returns of the fund for the past five years were; for 2014 the returns generated by the benchmark index of the fund were 0.72 per cent, for 2015 the returns generated by the benchmark index were -1.34 per cent, for 2016 the returns generated by the benchmark index were 19.04 per cent, for 2017 the returns were 11.91 per cent and for 2018 the returns were -8.77 per cent.

The benchmark index has outperformed the ETF in the calendar years 2014, 2015 and 2016. In calendar year 2017 the ETF has outperformed the benchmark index. In 2018, the benchmark index has again outperformed the ETF.

The top 10 holdings of the ETF on 22 November 2019 were HSBC Holdings Plc (6.29% of the corpus), BP Plc (5.33%), Royal Dutch Shell Plc (5.25%), Astrazeneca Plc (5.22%), Royal Dutch Shell Plc Class B (4.56%), Glaxosmithkline Plc (4.50%), Diageo Plc (3.91%), British American Tobacco Plc (3.65%), Unilever Plc (2.64%) and Rio Tinto Plc (2.46%).

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