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FAQs
FAQs for ETCs
FAQs for Oil ETCs
FAQs for Short/ Leveraged ETCs
FAQs for ETFs
FAQs for ETFs tracking 2x Short/ 2x Leveraged equity indices
FAQ for Currency ETCs
FAQs for ETCs
1. Who is ETF Securities (ETFS)? ETF Securities is a provider of Exchange Traded Products (ETFs, Commodity ETCs and Currency ETCs). The management of ETF Securities pioneered the development of ETCs, with the world's first listing of an ETC, Gold Bullion Securities in Australia and London in 2003 and then the world's first entire ETC platform which was listed on the London Stock Exchange in September 2006. ETF Securities now offers more than 270 Exchange Traded Products (ETPs). The ETPs provide investors with a wide variety of investment strategies, with ETPs offering access to asset classes such as equities, currencies and commodities with physical, long, forward, leveraged and short exposure. ETPs are simple to access as they are traded in up to five currencies (EUR, USD, GBP, JPY and AUD) and listed on up to nine major exchanges globally including the London Stock Exchange, the New York Stock Exchange, the Tokyo Stock Exchange, NYSE-Euronext Paris, NYSE-Euronext Amsterdam, Deutsche Börse, Borsa Italiana, the Australian Securities Exchange and the Irish Stock Exchange. 2. What are Exchange Traded Commodities (ETCs)? ETCs are simple and transparent open-ended securities which trade on regulated exchanges. ETCs enable investors to gain exposure to commodities without trading futures or taking physical delivery. ETFS-branded ETCs are secured, undated, limited recourse debt securities that are designed to track underlying commodities or commodity indices. 3. Are ETCs very similar to Exchange Traded Funds (ETFs)? ETCs are very similar to ETFs because they are both open-ended, continuously traded and have multiple market makers. The main difference is that ETCs use a secured, undated, limited recourse debt securitiy structure, whereas ETFs typically use a fund structure. 4. How do I buy and sell an ETC? Investors can buy and sell ETCs throughout the trading day on regulated stock exchanges through ordinary brokerage accounts. 5. Who is the Issuer? ETF Securities’ ETC issuers are special purpose vehicles (SPVs) created to issue ETCs: ETFS Oil Securities Limited is the Issuer for 9 Oil Securities, ETFS Commodity Securities Limited is the Issuer for over 100 commodity ETCs, ETFS Metal Securities Limited is the issuer of 5 physically backed precious metal ETCs ,Gold Bullion Securities is the issuer of 1 physically backed gold ETC and ETFS Industrial Metal Securities Limited is the issuer of 4 physically backed industrial metal ETCs. The assets of each Issuer and class of security are ring-fenced for investor protection. The Issuers are administered by ETFS Management Company (Jersey) Limited. 6. How are ETCs priced and where is the information published? All ETCs are priced using a fixed pricing formula which each use a reference price relating to the relevant underlying commodity or commodity index: The specific pricing formulae are set out in the prospectus(es) of each Issuer. ETFS Oil Securities are priced directly off the closing settlement price of the relevant oil or carbon emissions allowance futures as published by the relevant futures exchange. ETFS Commodity Securities are priced using the closing price of the DJ-UBS Commodity IndexSM sub-indices and published by CME Indexes; ETFS Metal Securities are priced using the PM Fixing spot price of the four relevant precious metals as published by the LMBA (in the case of gold and silver) or LPPM (in the case of platinum and palladium). Gold Bullion Securities are priced using the PM ficing spot price of gold ETFS Industrial Metal Securities are priced using the LME cash settlement price of the relevant industrial metal. 7. Who calculates the underlying DJ-UBSCISM commodity indices, and where is the information published? CME Indexes (formerly Dow Jones) and UBS calculate the DJ-UBS Commodity IndexSM and sub-indices each trading day based on the relevant closing/settlement price(s) published by CME Indexes (at www.djindexes.com) and distributed through many data distributors, including Bloomberg and Reuters. 8. Do ETCs track the underlying commodity price? ETCs which track commodity futures prices are almost 100% correlated (before fees and expenses) with the underlying futures price, however the spot price return is not an investable return. The ETCs are designed to earn a return similar to that which could be earned from investing in the underlying commodity futures markets. ETCs (other than those with a short or leveraged element) which track commodity futures indices are almost 100% correlated (before fees and expenses) with the settlement price of the underlying futures index, however the spot price return is not an investable return. The ETCs are designed to earn a return similar to that which could be earned from investing in the underlying commodity futures index. ETCs which are physically backed are priced directly off the metal spot price and therefore returns are 100% correlated (before fees and expenses) to the underlying price. 9. Do ETCs make interest or dividend payments to investors? No interest or dividend payments are made to investors. 10. Why are some ETCs priced off futures and some priced directly off physical metals? Some ETCs (ETFS Oil Securities and ETFS Commodity Securities) are priced off futures as it is not possible to store - for long periods - some physical commodities. In addition, futures pricing can be more liquid and efficient for some commodities, especially where the futures contract helps to standardize the pricing - for example, agricultural commodities where quality can vary between crops, seasons and regions. In the case of the physical precious metals ETCs, precious metals are homogenous, can be stored easily and do not decay, and therefore can be priced directly off the underlying physical commodity. 11. How can you guarantee the tracking error remains minimal? Similar to ETFs, ETCs are open-ended securities, and therefore Authorised Participants (who are generally investment banks with commodities expertise) can create or redeem ETCs at their underlying value or NAV. Tracking error is also reduced by using fixed pricing formulae which use the price of the underlying as a reference. 12. How is liquidity provided? ETCs are open-ended, therefore new ETCs can be created by Authorised Participants according to demand. The liquidity of ETCs is generally only impacted by the liquidity of the relevant underlying commodity market(s). 13. What would happen if ETF Securities were to go bankrupt? In the event that ETF Securities were to go bankrupt, there should be no impact on the assets of the Issuer as these are ring-fenced from the assets of ETF Securities and are held by the Issuer for the benefit of security holders. 14. What is the credit risk of the different ETCs? Please refer to the Counterparty Risks Educational documents to get an understanding of the credit risk.
All ETFS-branded ETCs are eligible investments for ISAs and SIPPs. 16. Are there any other costs besides Management Fees? As well as any normal transaction costs which your broker or financial advisor will charge you, the following are the costs additional to the Management Fee associated with the ETCs: ETFS Metal Securities: None ETFS Classic Commodity Securities:
Your broker or financial advisor should be able to buy or sell ETCs as they are listed on regulated exchanges. Most brokers should be able to convert a USD amount to another currency. 18. Can investors lose money? The price of ETCs can go up or down, however investors cannot lose more than the amount of the initial investment. 19. Are ETCs subject to Stamp Duty or Stamp Duty Reserve Tax? ETFS-branded ETCs are not subject to Stamp Duty or Stamp Duty Reserve Tax. 20. Are there other tax considerations for investors? Investors should consult their own professional advisers as to the implications of their subscribing for, purchasing, holding, switching or disposing of ETCs under the laws of the jurisdiction in which they may be subject to tax. Tax legislation may change. 21. What is the difference between ETCs and certificates or turbos? ETCs are open-ended securities backed by either physical precious or industrial metals or swaps with major financial institutions who are leaders in the respective field, and multiple market makers ensure tight bid-offer spreads for trading on regulated exchanges. Certificates or turbos are notes created, priced and traded by issuing banks(often with no formal exposure to the underlying reference asset) - there are no creations/redemptions on demand and they are generally less liquid. 22. Why have ETF Securities introduced ETCs that offer exposure to different maturities (i.e. ETFS Brent 1yr, ETFS Forward Agriculture)? Because the ETCs are priced off underlying commodity futures markets, this provides the possibility of having different price exposures along the commodity futures curve. ETF Securities now provides an entire commodity platform allowing investors more choice and the ability to undertake a wider range of investment strategies. 23. If I invest in ETCs, is my investment covered by the Financial Services Compensation Scheme? The FSCS applies to financial advice and investment firms and not products. ETFs and ETCs are therefore not directly covered by the FSCS. 24. Who regulates ETF Securities and ETCs The prospectus(es) of each ETC issuer is approved by the UK Financial Services Authority in its capacity as UK Listing Authority. The issuers and their manager (ETFS Management Company (Jersey) Limited) are regulated by the Jersey Financial Services Commission. By virtue of the listing of the ETCs on the Official List of the UK Listing Authority and their admission to trading on the London Stock Exchange, the issuers are subject to the UK Listing Rules, Prospectus Rules and Disclosure and Transparency Rules of the UK Financial Services Authority as well as the Admission Standards of the London Stock Exchange. 25. Can I take physical delivery of the metal backing physical metals products upon redemption? All physical metals products can be redeemed by delivery of the underlying metal - in the form of bullion in the case of the precious metals products and in the form of LME Warrants in the case of the industrial metals products . The rights to physical redemption belong to both Investors and Authorised Participants for ETCs issued by Gold Bullion Securities Limited and just to Authorised Participant for ETCs issued by ETFS Metal Securities Limited and ETFS Industrial Metal Securities. Please refer to the relevant prospectus for more information. 26. Has the cessation of the Lyxor marketing agreement had any impact to the structure of Gold Bullion Securities? Lyxor were marketing agent for Gold Bullion Securities. Lyxor had no ownership rights to the company. All operations and management of the Issuer and ETC stays the same without any impact on the Issuer and ETC. 27. Who audits the metal bars for physically-backed precious metal ETCs? The metal bar audit is done twice a year by Inspectorate International, the world leader in commodity inspection and testing. Inspectorate International is a global company providing inspection, testing, and analysis of commodities worldwide, such as metals and minerals. For more information visit: www.inspectorate.com To view the latest audited bar count for physically backed products, please click here. 28. What is the difference between ETFS Physical Gold and Gold Bullion Securities? The structures are very similar, track the spot price of Gold less management fees and both trade just like a stock on exchange. Gold Bullion Securities (LSE ticker: GBS) was the first physically backed Gold ETC in the world, listed in 2003. ETFS Physical Gold (LSE ticker: PHAU) was created in 2007 because ETF Securities recognised the need for an ISA eligible physically-backed Gold ETC. There is also a slight difference in management fee; GBS has a 0.40% per annum MER and PHAU has a 0.39% p.a. MER. Therefore, they are very similar products apart from the ISA eligibility which is relevant only for UK investors. 29. Do your Exchange Traded Commodities, Exchange Traded Currencies, Exchange Traded Funds have distributor or reporting status? ETF Securities has applied for and has achieved ‘distributor’ or ‘reporting’ status for all its products listed prior to June 2010. This protects the tax treatment of ETF Securities’ products as capital gains eligible at rates of 18% or 28%. For ETF Securities’ products listed since June 2010, application for Reporting Fund status has either been submitted, or will be submitted within 3 months of their initial listing and, based on its experience, ETF Securities fully expects to receive Reporting Fund status for those products as well. For all products to be listed in the future, we intend to apply for Reporting Fund status within this 3 months timeframe. Click here for full list.  FAQs for Oil ETCs
1. I have recently purchased ETFS Crude Oil or ETFS Short/Leveraged Crude Oil and have noticed that it does not always track the oil price. Why? ETFS Crude Oil (CRUD) is designed to track the DJ-UBS Crude Oil Sub-IndexSM which is priced off oil futures. Investing in oil futures is not the same as investing in the oil "spot" price. The figure below shows that ETFS Crude Oil has tracked the DJ-UBS Crude Oil Sub-IndexSM exactly as it should. 
2. What is the DJ-UBS Crude Oil Sub-IndexSM? The DJ-UBS Crude Oil Sub-IndexSM tracks a rolling, fully collateralised investment in near month oil futures, which is not the same as tracking the oil "spot" price. The Dow Jones-UBS Commodity IndexesSM are priced off commodity futures contracts, and not physical oil. Commodity futures contracts normally specify a certain date for delivery of the underlying physical commodity. To avoid expiry and physical delivery of the underlying commodity referred to in the futures contract, the index methodology (available at www.djindexes.com) therefore specifies that as each futures contract approaches expiration, they are sold and replaced by similar contracts with later expirations. This process is called "rolling" and is currently the main source of any performance differential between the DJ-UBS Crude Oil Sub-IndexSM and the WTI spot oil price. 3. Why can’t you just track the oil price? Tracking the oil "spot" price (meaning the prices quoted for immediate payment and delivery of particular physical commodity) implies physical ownership of the commodities and a number of associated costs such as delivery, storage and insurance. The oil "spot" price which you see on Bloomberg or quoted in the news is by definition not an investable return. As a result, investors throughout the world, and also ETCs, use liquid and standardized futures contracts to get exposure to the oil market. Standardised futures contracts imply delivery costs of pre-specified deliverable grades, at a particular location. 4. What is the DJ-UBS Crude Oil Sub-IndexSM? The correlation between the DJ-UBS Crude Oil Sub-IndexSM and the oil "spot" price has historically been very strong (average 0.99) as shown by the chart below. 
5. Can ETFS Crude Oil outperform the oil "spot" price? Yes, when the oil market is in backwardation, the roll return may be positive and therefore ETFS Crude Oil could outperform the oil "spot" price. As the chart below shows, ETFS Crude Oil outperformed the oil "spot" price during periods when the oil market is in backwardation such as the 2002-2006 period. 
6. What causes this difference in returns? ETCs issued by the ETF Securities group of companies (excluding those backed by physical bullion) are total return securities. A total return is the return that an investor can earn by holding a continuous, fully collateralised position in commodity futures. A total return consists of three sources of return: Commodity Price ("Spot") Return, Roll Return, and Collateral Return. The roll return is the return associated with selling near month futures contracts prior to expiry, and re-investing the proceeds in the "next" month futures contract; rolling keeps an investor fully invested. For any long ETC, the roll return will be positive when the futures curve is downward sloping ("backwardation") or negative when the futures curve is upward sloping ("contango"). The opposite is true for short ETCs. 7. Is there any way to avoid the (negative or positive) roll? No, rolling is an inherent feature of investing in the commodities futures market. While a financial investor cannot avoid it, there are different ways to play the shape of the futures curve. 8. Is the roll yield more frequently positive or negative? The roll return depends on the shape of the futures curve and also the maturity of the specific contract. The shape of the oil futures curve changes over time as various factors such as supply and demand, inventory levels, cost of carry, volatility and investor’s expectations about future prices evolve. 9. Why does an oil ETC return differ from the return of the front month oil future contract I see on Bloomberg/Reuters? Use of a "Generic" contract can be a source of confusion in some instances. This is because of both the fact that it does not include rolling returns and that rolling methodologies used (1st-5th Business day or 6th-10th business Day) differ from the maturities of the underlying contracts (generally around the 20th of each month). 10. How can I monitor the shape of the oil futures curve on Bloomberg? There are several functions that can be useful to monitor commodities markets: GLCO - Global commodity prices and data GCIN - Display/track global commodity indices CCRV - Analyse futures curves HS - Analyse historical Contango / Backwardation 11. How can I get exposure to more or less roll yield? Research has shown that ETCs with exposure to front month futures such as ETFS Crude Oil or ETFS Brent 1mth (OILB) tend to be more sensitive to factors affecting the short term supply / demand picture (such as economic announcements, geopolitical tensions or inventory levels). At the same time, the performance of these ETCs has been more affected by contango / backwardation than longer-dated ETCs. ETCs with exposure to longer-dated futures such as ETFS Brent 1yr (OSB1) tend to be driven more by perceptions of long term structural supply, demand and cost issues which tend to change more slowly. Back testing shows that longer dated ETCs such as OSB1 or OSB3, have been affected less by contango / backwardation, and their price has also tended to be less sensitive to short term news and events. 
FAQs for Short/ Leveraged ETCs
1. Can I lose more than my initial investment while investing in Short/ Leveraged ETCs? No, for example if you were to buy $100 worth of Short or Leveraged ETCs there is a possibility that over a period of time the amount invested could fall to zero if the index the ETC is tracking moves against you. However, the investor can never lose more than that original investment. 2. The Index which the Short/ Leveraged ETC is tracking has moved by 'X' % over the past week but my Short / Leveraged ETC has moved 'Y'%. Why doesn't the ETC track the exact movement of the Index? The Short or Leveraged ETC is designed to track -1 or 2 times the daily % change of the index. However, the return may not equal -1 or 2 times the change in the Index over periods longer than one day. Please see Part 2 of the Prospectus for more information. 3. Do I have to invest more collateral (as margin) if the index moves against me? No, because the position is 100% collateralised. 4. Do I need to borrow stock to buy a Short ETC? No, there is no need to borrow stock to buy a Short ETC. A Short ETC is designed to allow investors to buy an investment with short exposure without the usual hassles associated with borrowing stock and selling short into the market. FAQs for ETFs
1. Who is ETF Securities? ETF Securities is a leading specialist provider of exchange-traded investment products. Since inception, the firm has been dedicated to providing investors with access to innovative investment solutions and continues to launch award-winning products across a broad range of markets and strategies. What began with the world’s first listing of an Exchange Traded Commodity back in 2003 has grown to become one of the most comprehensive ranges of commodity- and currency-based ETCs in the world. For further information, please visit: www.etfsecurities.com 2. What is ETF Exchange (ETFX)? Exchange-traded funds (ETFs) are open-ended, cost-effective, UCITS-compliant investment funds which are designed to track the performance of specified market indices. They are listed on regulated stock exchanges and trade and settle like individual shares. ETF Exchange is a unique ETF platform. Enhanced by a consortium of leading global investment banks, ETF Exchange is dedicated to providing access to premium, cost-effective and flexible investment solutions. First introduced in September 2008 by exchange-traded commodity pioneers ETF Securities, all funds on the platform are collateralised and employ total return swaps to replicate index performance. The platform is designed to help mitigate credit risk, disperse counterparty exposure and reduce tracking error and liquidity – enabling investors to concentrate on making the most appropriate investment decisions 3. What are Exchange Traded Funds (ETFs)? ETFs are low cost, transparent, index tracking funds which trade on regulated stock exchanges. ETFs enable investors to gain exposure to well-known equity indices or sectors in one trade as easily as buying any ordinary share. ETFX-branded ETFs are UCITS funds that are designed to accurately track the underlying index (excluding fees and expenses). 4. How do I buy and sell an ETF? Investors can buy and sell ETFs throughout the trading day on regulated stock exchanges through ordinary brokerage accounts. 5. Who is the Issuer? The Issuer is ETFX Fund Company plc, which is an Irish domiciled open-ended investment company having segregated liability between its sub-funds and is authorised by the Central Bank of Ireland as a UCITS. 6. How are ETFs priced and where is the information published? ETFX’s range of ETFs are typically priced off the underlying equity index which they are designed to track. They have a Net Asset Value which is calculated once a day. More information on pricing of ETFs is available on the ETF Securities website. N.B. The one exception to this, is the ‘COMF’ ETF which tracks commodity futures. 7. Do ETFs make dividend payments? ETFX’s range of ETFs do not pay dividends to investors. Any income received by the in the form of dividends (if any) is reinvested in the ETF. 8. How can you ensure the tracking error remains minimal? ETFs are open-ended funds, and therefore Authorised Participants (who are generally investment banks) can create or redeem ETFs at their underlying value or NAV. This helps promote ETF pricing that does not trade at a premium or discount to the NAV. 9. How is liquidity provided? ETFs are open-ended, therefore new ETFs can be created by Authorised Participants according to demand. Liquidity can be measured in a number of ways: the AUM of the ETF, the daily traded volumes, or the liquidity of the relevant underlying equities. 10. What is the credit risk for investors? The structure is UCIT compliant, with segregated liability between the assets of each ETF. Performance is achieved through collaterised swap contracts provided by multiple swap providers (the investment banks). ETFs therefore can have counterparty exposure to the investment banks, proportional to the value of the swaps provided by each bank. This exposure however is mitigated by the provision of collateral to the relevant ETF by the banks. The value of the collateral provided represents 100%-110% of the value of the swap contracts. The variation in percentage being dependent on the type of collateral provided. This collateral is also UCITS-compliant, and published daily on the ETF Securities website. This collateral is not used for stock lending. 11. What would happen if ETF Securities were to go bankrupt? If in the unlikely situation ETF Securities was to go bankrupt, this would not affect the value of the ETFs. Each ETF is a standalone fund whose assets are segregated for investor's safety. ETF Securities does not hold any investor money – instead cash collateral is held via highly rated third party providers. Bank of New York Mellon provides custody, administration, collateral and trustee services to ETFX. 12. Are ETFs eligible investments for ISAs, SIPPs and CTFs? All ETFX-branded ETFs are eligible investments for ISAs, SIPPs and CTFs. 13. Are there any other costs besides Management Fees? Your broker or financial advisor may charge you normal transaction costs (commissions) associated with the purchase or sale of ETFs. It is also important to note however that there is typically a cost associated with swap provision. This varies by ETF, and will impact the tracking error of the ETF (i.e. ETF performance vs. index performance). 14. Can investors lose money? The price of ETFs can go up or down with the market, however investors cannot lose more than the amount of the initial direct investment in the ETF. 15. Are ETFs subject to Stamp Duty or Stamp Duty Reserve Tax? ETFX-branded ETFs are not subject to Stamp Duty or Stamp Duty Reserve Tax. 16. Do ETFs hold UK distributor status? The ETF Exchange products have historically had UK distributor status. This has now been replaced by Reporting Fund Status (RFS). Under Regulation 55(1) (a) of The Offshore Funds (Tax) Regulations 2009 on behalf of HM Revenue and Customs they have accepted the following funds into the Reporting Fund regime with effect from the dates listed.
17. Are there other tax considerations for investors? Investors should consult their own professional advisers as to the implications of their subscribing for, purchasing, holding, switching and/or disposing of ETFs under the laws of the jurisdiction in which they may be subject to tax. Tax legislation may change. 18. What is the difference between ETFs and traditional index tracking funds?
19. Are ETFs covered by the FSA compensation scheme? ETFs are covered by the FSA compensation scheme. 20. Who regulates ETF Securities and ETFs? The issuer and manager of ETFX’s range of ETFs are both domiciled in Ireland and are authorised by the Central Bank of Ireland. ETF Securities (UK) Limited is authorised and regulated by the Financial Services Authority (FSA). FAQs for ETFs tracking 2x Short/ 2x Leveraged equity indices
1. Can I lose more than my initial investment while investing in an ETF a tracking Short/ Leveraged equity indices? No, for example if you were to buy $100 worth of an ETF tracking a Short or Leveraged index there is a possibility that over a period of time the amount invested could fall to zero if the index the ETF is tracking moves against you. However, the investor can never lose more than that original investment. 2. The return from the ETF tracking the leveraged/short index is different from 2x or -2x the long index return over the last week or month? Why doesn't the short/leveraged index track the exact movement of the long index? The ETFs track a leveraged/short index which is designed to provide 2x or -2x the daily % change in the reference index (for example, the FTSE 100® Leveraged Index is designed to provide twice the daily percentage change in the level of the FTSE 100® Index) before fees and expenses. However, the return may not equal 2 or -2 times the change in the Index over periods longer than one day. This is due to the daily rebalancing of the leveraged/short index and also the fact that volatility in the reference index tends to magnify gains and losses in the 2x leveraged or 2x short index. 3. How can daily rebalancing affect the performance of 2x leveraged equity indices? 2x leveraged equity indices are designed to provide twice the daily percentage change in the level of their reference index (i.e. the 1x index) and due to the compounding of daily returns, returns measured over periods longer than one day may differ from twice the reference index return over that longer period. To demonstrate this we take the example of a reference index rising 5% over a 5-day period. In Scenario 1 the reference index achieves the 5% return through various up and down days. In Scenario 2 the index is up 5% over the period following 5 consecutive up days. (For simplification purposes, these 2 scenarios exclude fees and other financing adjustments).
For more information about long term performance of ETF Securities ETFs tracking 2x leveraged indices please see the description of risks in the prospectus. 4. How can daily rebalancing and volatility affect the performance of 2x short equity indices? 2x short equity indices are designed to provide the inverse of twice the inverse of the daily percentage change in the level of their reference index (i.e. the 1x index) and due to the compounding of daily returns, returns measured over periods longer than one day may differ from twice the inverse of the reference index return over that longer period. To demonstrate this we take the example of a reference index falling 5% over a 5-day period. In Scenario 1 the index achieves the -5% return through various down and up days. In Scenario 2 the index is down 5% over the period following 5 consecutive down days. (For simplification purposes, these 2 scenarios exclude fees and other financing adjustments).
For more information about long term performance of ETF Securities ETFs tracking 2x short indices please see the description of risks in the prospectus. 5. Do I have to invest more collateral (as margin) if the index moves against me? No, because the position is 100% collateralised. 6. Do I need to borrow stock to buy an ETF tracking a leveraged short equity index? No, there is no need to borrow stock to buy an ETF tracking a leveraged short equity index. ETF tracking a leveraged short equity index are designed to allow investors to buy an investment with leveraged short exposure without the usual hassles associated with borrowing stock and selling short into the market. 7. Are ETFs tracking Short/Leveraged equity indices suitable for buy & hold investing? ETFs tracking short/leveraged equity indices are designed to provide 2x or -2x times the daily % change in the reference index (for example, the FTSE 100® Leveraged Index is designed to provide twice the daily percentage change in the level of the FTSE 100® Index). Investors who choose to hold the ETFs for periods longer than one day should acknowledge that these products are designed for short-term investment strategies and that the ETF return may not equal 2x or -2x the change in the Index over periods longer than one day. This is due to the daily rebalancing of the leveraged/short index and also the fact that volatility due to leverage in the reference index tends to magnify gains and losses in the 2x leveraged or 2x short index. Additionally, increased market volatility and longer holding periods may accentuate the effects of daily rebalancing and leverage and as a result, your investment may not perform as you expect. 8. Where can I get information on the short/leveraged equity indices? ETF Securities' factsheets include index descriptions, codes and historical performances for all indices used. For more detailed information, all our index providers have websites that provide daily performance; their web address is available on the individual products factsheets. Alternatively you can look up the indices on Bloomberg using the codes provided. FAQ for Currency ETCs
1. What are Exchange Traded Currencies (Currency ETCs)? Currency ETCs are simple and transparent open-ended securities that trade on regulated exchanges. They provide investors with exposure to currencies without the potential complication of trading forwards. ETFS-branded Currency ETCs are undated, limited recourse, secured debt securities. The individual Currency ETCs are designed to track a total return foreign exchange index calculated and published by Morgan Stanley & Co. Incorporated. 2. How do the Morgan Stanley Foreign Exchange (MSFXSM) Indices work? These total return indices (USD, EUR and GBP) aim to reflect the daily change in the rate of exchange between a single currency position against the base currency, plus, in the case of G-10 currencies, the overnight interest rate differential. There is also a collateral yield based on the risk free rate. Exposures offered include G-10 currency pairs and two Emerging Market currencies – the Chinese Yuan (CNY) and Indian Rupee (INR) – versus the USD. 3. Could you explain how the triple long and triple short versions of the MSFXSM Indices work? These indices provide a leveraged exposure representing three times:
4. Returns on the MSFXSM Indices are path dependent, what does this mean? The MSFXSM Indices rebalance daily, meaning that returns over periods longer than one day are path dependent. The triple leveraged currency ETCs therefore have the scope to deliver compound returns in trending markets and will likely ‘underperform’ in volatile, directionless markets. It is important that investors understand this feature of the returns, the details of which are further set out in the prospectus of ETFS Foreign Exchange Limited. Note that whatever the market conditions, the triple leveraged Currency ETC will track the relevant triple long or triple short version of the MSFXSMIndex less fees and adjustments. 5. How are Currency ETCs priced and where is the information published? They are priced directly off the underlying MSFXSM Indices. Detailed pricing is available for all securities on the ETF Securities website. The pricing formulae are contained in the ETFS Foreign Exchange Limited prospectus 6. Who calculates the underlying MSFXSM Indices, and where is the information published? The MSFX 7. Why are there different index base currencies? There are three base currencies: the US dollar (USD), the euro (EUR) and sterling (GBP). Investors using Currency ETCs would typically take positions using their base currency, i.e. a euro-based investor would look at the EUR indices. The convention followed by the Currency ETCs is for the base currency to be the second named currency in any pair. The following are some illustrations of how investors would express views:
Please note that a sterling investor buying ETFS Long GBP Short USD, ie a US dollar index, would have no currency exposure and the same would be true for a Euro investor holding ETFS Long EUR Short USD. Both positions would yield a return based on the interest rate differential and collateral yield. 8 How does the tracking error remain minimal? The ETFS Foreign Exchange Limited prospectus contains the pricing formula applied to individual Currency ETCs each day to calculate the net asset value. An investor in a Currency ETC therefore can work out what tracking error to expect over the course of a year. 9. Who is the issuer? The issuer is a special purpose vehicles (SPV) created to issue ETCs: ETFS Foreign Exchange Limited. The assets of the issuer and each class of security are ring-fenced for investor protection. The Currency ETCs are administered by ETFS Management Company (Jersey) Limited part of the ETF Securities Group. 10. How is liquidity provided? Liquidity is derived from the underlying foreign exchange market and will reflect that of the underlying currency pairs. Currency ETCs are open-ended, therefore new Currency ETCs can be created by authorised participants according to demand. Morgan Stanley & Co. International plc, the counterparty, provides a minimum level of daily liquidity on each currency pair that can accommodate institutional flows. These levels are published in the ETFS Foreign Exchange Limited prospectus. 11. What would happen if ETF Securities were to go bankrupt? In the event that ETF Securities were to go bankrupt, there should be no impact on the assets of the Issuer as these are ring-fenced from the assets of ETF Securities and are held by the Issuer for the benefit of security holders. 12. What is the credit risk of the Currency ETCs? ETFS Foreign Exchange Securities Limited has been set up as a special purpose vehicle to issue Currency ETCs. The exposure to the underlying currency indices is provided by a counterparty: Morgan Stanley & Co. International plc. Counterparty risk is minimised by form of daily mark to market payments, and cash is used to enter repo transactions with Morgan Stanley & Co. International plc in exchange for eligible collateral. The eligible collateral is held by the collateral manager Bank of New York Mellon in a custody account and valued daily. The value of the collateral is marked to market daily to reflect the value of Morgan Stanley’s obligations to the issuer. The collateral is held in the name of the issuer. Click here to view the counterparty risk factsheet for Currency ETCs. 13. What is the difference between Currency ETCs and CFDs, certificates and warrants? The collateralised structure of Currency ETCs has been covered above. Once listed on the stock exchange, the Currency ETCs are supported by multiple, independent market makers who compete for business. Certificates or warrants are notes created, priced and traded by a single issuing bank - there are no creations/redemptions on demand and they are generally less liquid. Similar considerations apply to CFDs, which will be offered and priced by a single house. CFDs, certificates and warrants will generally involve uncollateralised counterparty exposure and may, in the case of CFDs, involve the scope for contingent liabilities. 14. Why would one use Currency ETCs rather than forwards? Forwards may involve uncollateralised counterparty risk, whereas Currency ETCs are collateralised. Currency ETCs, which trade and settle like equities, provide operational simplicity. In contrast, forwards require administrative and legal work (negotiation of contracts) and operational resources (rolling and managing positions, monitoring risks), which may prove cumbersome and costly. Furthermore, certain client mandates may only permit the use of forwards for hedging purposes. 15. Could it make sense to transact in the spot market and open a cash account? This may make sense in certain circumstances but there may be a lack of transparency on the exchange rates. In addition, there will be currencies for which it may be difficult to access money market funds or interest rates, e.g. opening an Australian dollar bank account or accessing a Japanese money market fund. 16 Can investors in Currency ETCs lose money? The price of Currency ETCs can go up or down, however investors cannot lose more than the amount of the initial investment. 17. Who regulates ETF Securities and Currency ETCs ETF Securities and its issuing subsidiaries are all incorporated in Jersey and are regulated by the Jersey Financial Services Commission (JFSC) and all require licences issued by the JFSC to conduct business. The Currency ETCs themselves are issued pursuant to a prospectus approved by the UK Listing Authority (part of the Financial Services Authority), which acts as the home regulator. 18. Are ETCs eligible investments for ISAs or SIPPs? All ETFS-branded Currency ETCs are eligible investments for ISAs and SIPPs. 19. Do Currency ETCs have reporting status? ETFS Foreign Exchange Limited has achieved Reporting Fund status for the Currency ETCs listed prior to June 2010. This protects the tax treatment of ETF Securities’ products as capital gains. An application for Reporting Fund status has been submitted for Currency ETCs listed since June 2010. For any future listings of Currency ETCs, it is intended to apply for Reporting Fund status within the relevant timeframe. Click here for full list. 20. Are Currency ETCs covered by the FSA compensation scheme? Currency ETCs are not a fund structure and ETFS Foreign Exchange Limited is a Jersey incorporated company and are not part of the FSA compensation scheme. 21. How do I buy and sell a Currency ETC? Investors can buy and sell Currency ETCs throughout the trading day on regulated stock exchanges through ordinary brokerage accounts. Currency ETCs are not subject to Stamp Duty or Stamp Duty Reserve Tax. |
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