Exchange Traded Funds

If you want to invest in an ETF, first of all you need to register with first direct Sharedealing Services. The service is easy to use and it allows you to buy and sell UK shares, Gilts and most UK listed ETFs direct online.

ETFs only charge an annual management charge (AMC) which includes expenses but there is no commission/rebate included.

What's more, transfers of shares in ETFs dont attract stamp duty reserve tax (if they're incorporated outside the UK). You only pay your online trading fee.

Because ETFs are listed on an exchange you can buy and sell your portfolio through a single listed stock. ETFs can be bought and sold any time the stock exchanges are open and you know the price you are buying or selling at straight away. Just one call to us, or the click of a button if you're online, and you can have an instantly diversified portfolio in the relevant market sector, such as the MSCI Brazil Index.

Traditional investment funds however are valued once a day and you don't know the price when you decided to buy or sell as a result of the time delay in actioning the request.

It's also worth pointing out that most UK listed ETFs are incorporated in Dublin. Investors in ETFs should be comfortable investing for themselves and willing to take on the associated risks of this. Because HSBC's ETFs are incorporated in Ireland, investors are advised that they may not benefit from some of the protection provided under the UK's Financial Services and Markets Act 2000, including the Financial Services Compensation Scheme.

You'll find details of specific differences between Index Tracker Funds and Exchange Traded Funds in the chart below.

ETFs can be backed by either physical securities or in some cases synthetic securities. Physically backed ETFs hold the actual assets in the index they are tracking. Synthetically backed ETFs, on the other hand, use complex instruments such as derivatives issued by a counter party to generate their performance. Physically backed ETFs is the default approach taken by most ETF providers. When investing in an ETF, please be aware of the risks associated with investing in synthetically backed ETFs and that the value of ETFs may rise or fall.

The risks of investing in synthetically backed ETFs include:

• Use of derivatives and counterparty risk - synthetic ETFs generally use over the counter derivatives which are not subject to central counterparty clearing arrangements
• Taxation outcomes may be different for investors in synthetic ETFs when compared with physical ETFs, depending on whether any gains or losses in the ETF are achieved through holding the assets that make up the index or are achieved through the derivative exposure. Any different taxation outcomes may significantly impact the effective return for investors in synthetic ETFs
• Market risk whereby market conditions such as lack of liquidity may make it difficult to buy or sell synthetic ETFs in certain circumstances.

To find out more, log on to Sharedealing and visit the ETF research centre.

Some ETFs only buy a representative sample of the assets in the index they are tracking. This may mean that the performance of the ETF will not match exactly the index they are tracking. This difference is often referred to as "tracking errors".

Some issuers of ETFs may be domiciled outside of Britain or the US where they may be subject to less regulation.

The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets.

If you want to invest in an ETF, take a look at first direct Sharedealing Services. The service is easy to use and it allows you to buy and sell UK shares, Gilts and most UK listed ETFs direct online.