Ask Annie: How safe will my cash be in exotic exchange-traded funds?


Q. I am attracted to exchange-traded funds by their low cost and flexibility, but am cautious given the underperformance of other investment products such as with-profits funds and split-capital trusts.

Are there are any specific drawbacks in ETFs, other than normal stock market risk? Are the funds covered by the Financial Services Compensation Scheme? SC, Bristol



A. ETFs are a hybrid product. Like shares and investment trusts, they can be bought and sold on a stock exchange. However, they work more like a unit trust tracker fund, with their value, up or down, being tied to the fluctuations of a particular stock market index rather than the share prices of a company or group of companies.

While the first ETFs to be marketed tracked indices in developed econo- mies, including the UK and US, they now follow just about anything, from emerging markets through to various specialist sectors, precious metals and other commodities.

There are hundreds of ETFs to choose from, including Barclays' iShares, Deutsche Börse's x-trackers and Invesco PowerShares. New funds are being launched all the time.

Like trackers, ETF fees are low because the funds simply follow the moves in an index and don't require any input from a manager. There is no stamp duty to pay when buying an ETF and they can be held in an individual savings account (ISA), where growth is free of tax. You will need to use a stockbroker to buy or sell the funds, with charges typically ranging from £10 to £15 for a single trade.

Mark Dampier of independent financial adviser Hargreaves Lansdown says: "ETFs are 'passive investments' like trackers, so there is nothing inherently dangerous about them. They are as safe as any stock market – there are no catches."

Any dangers, he adds, would arise with the indices in which you are invested. For example, markets such as the Chinese FTSE/Xinhua 25 or India's Sensex can be high risk.

"Investors often don't understand exactly what their exposure is, because they don't realise the proportion that a particular share gives to various indices," says Mr Dampier. "For instance, ICICI, India's second-biggest lender, which has been hit by fallout from the US sub-prime crisis, and Reliance Industries, India's largest petrochemical firm, together account for about a quarter of the weight of the Sensex."

"So if these companies fall on hard times, they can bring the index down by more than an unwary investor might realise."

A spokesman for the Financial Services Compensation Scheme says you would not be covered for any loss you make on an ETF investment. However, if you think you have been mis-sold an ETF by a financial adviser or broker – for example, you may have been told the performance would be guaranteed – then you could take a case to the Financial Ombudsman, who can order compensation.



Q. I received some money over a year ago direct into my bank from the Pensions Annuity Friendly Society. The payment has been worrying me as I have no idea where the money has come from and I can't find any trace of this society. TJ, Basingstoke



A. Members of the mutual Pensions Annuity Friendly Society, the UK's first writer of impaired and enhanced annuities, voted for demutualisation and a management buyout in 2005, and as a result received a minimum windfall of £500. The business was rebranded Partnership Assurance, and you can check to see the reasons for your payment by calling 020 7618 2800.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Dennis Stinchcombe, of Broad Plain Boys' Club in Bristol, by a Banksy artwork, titled 'Mobile Lovers', where the sale and handover have been completed at the Bristol Museum & Art Gallery, where it was on display to the public.
artHuge price will help to keep a 120-year-old youth club in Bristol open
News
i100'Geography can be tough'
News
newsVideo targets undecided voters
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
tv
PROMOTED VIDEO
Life and Style
Cooked up: reducing dietary animal fat might not be as healthy as government advice has led millions of people to believe
healthA look at how governments started advising incorrectly on diets
Life and Style
Evan Spiegel, the founder of Snapchat, dropped out of Stanford University just before graduation to develop his app
techAnd yes, it is quite a lot
News
REX/Eye Candy
science
News
A photo of Charles Belk being detained by police on Friday 22 August
news
News
i100
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

    Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

    Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

    £50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

    DevOps Engineer - (Linux, Shell, Bash)

    Negotiable: Harrington Starr: DevOps Engineer - (Linux, Shell, Bash)DevOps Eng...

    Calypso Developer

    £500 - £700 per day: Harrington Starr: Calypso Developer Calypso, J2SE, XML, ...

    Day In a Page

    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    Could a later start to the school day be the most useful educational reform of all?

    Should pupils get a lie in?

    Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
    Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

    Charles Dickens: A tale of two writers

    Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
    Prepare for Jewish jokes – as Jewish comedians get their own festival

    Prepare for Jewish jokes...

    ... as Jewish comedians get their own festival
    10 best cycling bags for commuters

    10 best cycling bags for commuters

    Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
    Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

    Kate Bush shows a voice untroubled by time

    A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
    Robot sheepdog technology could be used to save people from burning buildings

    The science of herding is cracked

    Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
    Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

    This tyrant doesn’t rule

    It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?
    Rachael Lander interview: From strung out to playing strings

    From strung out to playing strings

    Award-winning cellist Rachael Lander’s career was almost destroyed by the alcohol she drank to fight stage fright. Now she’s playing with Elbow and Ellie Goulding
    The science of saturated fat: A big fat surprise about nutrition?

    A big fat surprise about nutrition?

    The science linking saturated fats to heart disease and other health issues has never been sound. Nina Teicholz looks at how governments started advising incorrectly on diets
    Emmys 2014 review: Can they genuinely compete with the Oscars

    Can they genuinely compete with the Oscars?

    The recent Emmy Awards are certainly glamorous, but they can't beat their movie cousins
    On the road to nowhere: A Routemaster trip to remember

    On the road to nowhere

    A Routemaster trip to remember
    Hotel India: Mumbai's Taj Mahal Palace leaves its darker days behind

    Hotel India

    Mumbai's Taj Mahal Palace leaves its darker days behind
    10 best pencil cases

    Back to school: 10 best pencil cases

    Whether it’s their first day at school, uni or a new project, treat the student in your life to some smart stationery