WHAT TO CONSIDER WHEN BUYING ETFs

Before you invest there are several elements you need to take into consideration to make sure that the investment meets your expectations. Costs, dividend and tax are a few considerations. Additionally you need to bear objectives, strategy and risks in mind before you decide to invest.

Objectives: Decide what objectives you would like to achieve.

Strategy: Choose the right ETF for your portfolio.

Risk: Keep in mind that the value of your investment may fluctuate. Check the specific risks and tax implications of various investment alternatives. For example, an investment in international markets may be associated with currency risk.

 


Risk considerations

iShares ETFs are a simple and cost-effective way to gain exposure to different markets. The aim of iShares ETFs is to offer investors returns based on the performance of the relevant underlying index. Using ETFs as building blocks, you can spread the risk of individual companies, entire sectors or even whole countries suffering losses. However, they will not mitigate all market risk, and you can still lose some, or all of your investment should the value of the underlying shares decrease. Note that the risks you expose yourself to are different per fund. The specific risks for each ETF be found in the prospectuses.

Risks associated with investing in ETFs

 

Type of ETF Associated risk
ETFs that hold securities in foreign countries subject to exchange rate movement
ETFs that hold securities in emerging markets and commodities can be subject to more extreme market conditions
ETFs that hold securities in bonds sensitive to interest rate movements

Ensure you fully appreciate all the risks associated with investing in ETFs including the specific risks of any fund before you invest.

Costs

Brokerage costs

As ETFs are bought and sold like shares, buyers and sellers will pay brokerage commissions when trading.

Fund costs

At iShares we believe in openness when it comes to discussing costs. This is why we publish the TERs for all of our funds online. That provides a good indication of how much the funds will be paying for fund management, trustees, licensing and operational costs.

However, we also feel it important that investors know about the implicit costs of ETF ownership, looking at areas such as trading costs and rebalancing costs.

When it comes to trading costs, there are two main considerations: the bid/offer spread (effectively the difference in the buy and sell price) and brokerage commissions. ETF spreads tend to be lower for bigger funds (those with more assets under management) and funds that have high daily trading volumes. Under extreme market conditions however, this sometimes may not be the case.

Another consideration is rebalancing costs. From time to time, securities can be added or removed from the index and funds tracking these indices will need to be adjusted accordingly. This will incur a cost element.

Distributions

Dividends

Most ETFs pay out dividends if the underlying securities within the fund pay out dividends. Please refer to the key facts of a fund to see if a fund is distributing or accumulating.

Traditionally, newer companies or companies experiencing a period of growth do not pay out dividends. They tend to reinvest the majority of their profits back into the company. It is the more established companies that tend to distribute dividends, however there is no guarantee that this is the case.

ETF investors are entitled to receive any dividend distributions from their fund, less fees and expenses. Dividends are paid out at least once a year but can be more frequent. iShares provides an online dividend calendar, which lets you know the dividend payment dates for our range of funds.

ETFs are purchased through a broker. Consequently, how investors receive distributions (cash or reinvested back into the fund) is determined by their agreement with their broker/dealer.

Tax

There is no typical tax rate on iShares investments, as each client has his or her own unique tax status. Shareholders may be subject to taxation in their home jurisdiction on distributed income, undistributed income, realised capital gains.

We would advise investors to consult their own tax advisor to ascertain their individual tax situation.