Benefits and risks

Flexibility

ETFs trade and settle like stocks, and they can be bought and sold any time during the trading day. The ‘modular’ (or building block) structure of ETFs makes them a very convenient portfolio construction tool. Each ETF can be used as a building block to form an entire portfolio, whether based on a single market or many regions (European and Asian equity markets) or asset classes (developed equity, emerging markets or fixed income). They can also be used in both short term and long term strategies.

As ETFs trade in the same way as equities, investors are also able to benefit from features like intraday pricing and trading, buying on margin and the ability to place stop and limit orders.

 


Cost-effectiveness

A further advantage of ETFs is their low fee structure. ETFs typically have much lower total expense ratios (TERs) than traditional mutual funds or active funds. The average TER for fixed income ETFs is 0.17%, and the average TER for equity ETFs is 0.40%, making them among the cheapest funds available in the market. The average TER for an active open-end equity mutual fund with international exposure for example, is 1.76% and for a bond fund 1.00%. An average international equity index fund has a TER of 0.78% and average fixed income index fund - a TER of 0.49%*.

 


Diversification

A single ETF transaction gives an investor instant exposure to the entire target investment market, helping to spread risk more widely than buying a small basket of individual stocks.

The building block nature of an ETF means that an investor can also achieve diversification by adding a specific market exposure to an existing portfolio.

 


Liquidity

ETFs are as easy to buy and sell as any large company stock. Active market making and quick and efficient ETF unit creation/redemption processes provide the depth to handle even the largest institutional capital flows.

ETFs offer two different sources of liquidity:

  • Traditional liquidity, as measured by secondary market trading volume on exchange
  • Liquidity provided by the unique creation/redemption process, which reflects the liquidity of the individual positions within the iShares fund. Essentially an ETF is as liquid as the underlying holdings

We explain more about ETF liquidity in our How do ETFs work section.

 


Transparency

iShares ETFs are transparent both in terms of costs and holdings. We publish the net asset values, costs and performance figures for all of our ETFs online every day. The fund holdings of most of our ETFs can also be accessed online. ETFs are also clear about what investors pay towards running the fund, as shown by the total expense ratio.

We think it is important clients know what they own. Investors can access portfolio information and check whether an equity fund owns specific securities at any given time. In fact, the Fund Search Tool allows investors to see quickly which iShares funds are exposed to a specific security.

*Source: Morningstar, Global ETF Research and Implementation Strategy Team, BlackRock. As at end February 2010.