ET-WHAT?

Learn on this page how ETFs are defined, how they track an index and what their names mean.

Physically replicating ETFs hold the securities of the index they track. Two methods are used to replicate the index: full replication, meaning the ETF holds all securities in exactly the same weighting as the index; and partial replication, where only parts of the index securities are replicated in the ETF. The latter is used, for example, for very broad or illiquid indices, ie whenever the cost of fully replicating the index can negatively impact the performance of the ETF.

A synthetic ETF does not hold the securities of the index but instead uses a financial derivative, usually a so-called swap. Such a swap agreement specifies that the ETF will receive from the counterparty the return of the benchmark index, but less other variable costs, called swap spreads, which depend on current market conditions. Derivatives-based ETFs offer the opportunity to invest in markets that are difficult or impossible to access for physically replicating funds, such as commodities or certain emerging markets.

Physical Replication - Full

• All securities within an index are purchased according to their weightings
• Most common and preferred method
• Full transparency and low tracking error
• Typically used for concentrated indices with liquid constituents

Physical Replication - Optimised/Sampled

• A limited number of securities within an index are considered
• For iShares Equity ETFs and IMFs optimisation is applied: model driven approach that is based on a risk model with factors (iShares uses the Aladdin risk modelling)
• For iShares FI ETFs and IMFs stratified sampling is applied: portfolio manager thoughtfully selects a subset of bonds that they believe will deliver the index performance while maintaining liquidity and minimising transaction costs
• Practical for indices with lots of constituents
• May track index less accurately than full replication

Synthetic / Derivative

• Synthetic products can use futures or swaps to deliver index return
• Swaps can be funded or un-funded
• There may be tax efficiencies that can be achieved with synthetic replication
• There can be additional risks associated with synthetic products, particularly counterparty, and require further due diligence

The index to be replicated is reflected in the naming of the ETF. In addition, there is the name of the provider, a regulatory note, the currency and the share class, which is the information about whether the ETF distributes or reinvests the income. In the example below, ‘ACC’ stands for ‘accumulating’ – ie reinvesting. Distributing ETFs are marked with ‘D’, ‘Dist’ or ‘Dis’ for ‘distributing’.

The abbreviation ‘UCITS’ means that the ETF must adhere to special European guidelines. These serve to protect private investors and are controlled by the national supervisory authority.

ETFs try to replicate an index. But what exactly is an index and how is the appropriate ETF created? You can find the answers to these questions here.

An index is a collection of securities intended to represent a particular market or market segment. An index is a theoretical concept and a barometer of the change, over time, in the positions it contains. It can be as broad as the entire US stock market or as narrow as a single country or industry. Indices are created by index providers such as MSCI, S&P or Dow Jones Company.

When creating an index, the providers define a wide variety of criteria that the values in the index must fulfill in order to be included in it. A wide variety of criteria and combinations are possible here, which is why there are so many indices. Possible criteria are for example:

• Investment class, such as stocks, bonds or commodities.
• Countries and regions, such as America, Germany or even the whole of Europe or emerging markets
• Industries or sectors, such as the IT or telecommunications industry
• Certain strategies that, for example, address specific topics such as sustainability 

Best known index providers & indices

• MSCI (Morgan Stanley Capital Investment) eg MSCI Acwi, MSCI World
• Standard & Poor's eg S&P 500
• FTSE Group eg FTSE 100
• Dow Jones Company eg Dow Jones
• Nihon Keizei Shimbun eg Nikkei

ETFs are financial instruments that make the various indices investable. ETFs attempt to replicate as closely as possible the underlying index used as a benchmark. Once an index provider has created an index, ETF providers such as iShares can launch the appropriate ETF. This is then given a security identification number so that it can be clearly identified. The ETF can now be bought and sold on each trading day without an issue surcharge.

Investors can choose from over 400 iShares ETFs¹. But how do you find the right ETF for your investment goals among this variety of products?

ETFs try to replicate indices. And since there is a wide range of indices, there is also a wide range of ETFs to choose from. Because of this variety, one's individual investment goals can be mapped very specifically. One can invest for the long or short term, in different asset classes, and in different regions and countries, sectors or strategies. In addition, many ETFs are also available as a savings plan, so that you can usually invest in the ETF of your choice for as little as €25 per month.

Examples for different ETF categories

• Investment class
• Strategy
• Region
• Market

iShares offers you a total of over 400 ETFs¹, many of which are also available as a practical savings plan. Check out your choices here or with your bank or advisor and see which ETF sounds good to you.

How can you use ETFs to structure your investment?

Determine your risk profile and choose a suitable allocation of the different asset classes. Combine different asset classes and regions to minimise risks. Examples of portfolios that are suitable for starting long-term asset accumulation with ETFs can be found here:

Learn about the current market environment when you invest.

¹ Data as at 31 March 2021 unless otherwise stated

So you’ve decided to invest with Exchange Traded Funds? Here we show ways on how you can access and implement ETFs in a portfolio. Regardless of which bank, direct bank or broker you prefer, you can find a suitable institution with which iShares works. iShares works with banks and brokers as well as digital asset managers.

Please see our current partner's offers.