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A fair exchange

iShares – iFTSE TMT

Type: Exchange-traded fund.

Aim: Growth by investing in technology, media and telecoms companies.

Minimum investment: Negotiable with stockbrokers.

Maximum investment: None.

Investment split: Media 35 per cent, telecoms 25 per cent, IT 26 per cent, software and computer services 14 per cent.

Place of registration: Dublin.

Isa link: Yes.

Pep transfers: Yes.

Charges: Annual 0.5 per cent.

Commission: None.

Tel: 020 7668 8007.

Broker Panel:-

Eric Woodward – Managing Director, EP Ward Group

Roy Rutter – Principal, Aptitude Financial Planning

Andrew Hosking – Managing Director, Eggar Forrester

Keith French – Managing Director, French & Associates

Broker Ratings (ave. marks out of 10):-

Suitability to market: 6.0

Investment strategy: 6.3

Past performance: 5.2

Company&#39s reputation: 7.0

Charges: 8.0

Commission: 3.6

Product literature: 5.5

iShares has introduced the iFTSE TMT fund, an exchange-traded fund that invests in the technology, media and telecoms (TMT) sector by tracking the FTSE TMT index. Barclays Global Inves tors will manage the fund.

Looking at how the fund fits into the market, Rutter says: “The TMT sector is at best overcrowded and alth ough the iShares concept is different to unit trusts and open-ended investment companies (Oeics), the underlying sectors and investment policies are similar. Is this trying to be a theme fund but res tricted to the UK?” Woodward says: “This is a relatively new breed of fund offered in the UK, although they are pretty popular in the USA. Although different, exch ange-traded funds will inev itably be compared with index tracking vehicles offered by unit trust and investment trust groups.”

French adds: “The iFTSE TMT fund is a new boy in town. Exchange-traded funds are popular in America and the iFTSE TMT fund will no doubt make its mark, although at the end of the day this is just another tracker fund.”

Turning to the type of client that the fund is suitable for, Hosking says: “This is for the relatively sophisticated investor who has an understanding of the risks involved in the TMT sector as well as the fundamentals of exchange-traded funds.”

French says: “There are a wide variety of investors here, from long-term savers to short-term speculators. An exchange-traded fund could be an alternative to an index tracking unit trust for an everyday saver investing for the longer term, but it is also a way for a more sophisticated investor to take a punt on the whole stockmarket or to hed ge on an existing portfolio.”

Woodward says: “The fund will have its main use as core holdings in portfolio construction or as a cost-effective way into a specialist area of the index market, so pension fund clients could use it.”

Rutter says: “This is for the more sophisticated investor who is taking on an active approach to their portfolio. It may also appeal to the Pep transfer market or to clients reviewing or consolidating holdings in individual shares” Moving on to the product&#39s strengths, Hosking says: “The product is extremely flexible in terms of trading and accessibility via stockbrokers,” while Woodward feels that the obvious strong point is cost, along with continuous live pricing, a simple charging structure and no stamp duty.

French says: “Exchange-traded funds are a cheap way to gain exposure to an entire index. The broking fees to buy and sell are nominal and they do not attract stamp duty, unless underlying securities are UK shares.

“The annual management fee is only 0.5 per cent, which makes them cheaper than Oeics, unit trusts and most investment trusts.”

Rutter adds: “Effectively, this is an index tracker and we have seen these prove very popular with both the experienced and the first-time inv estor. There are also the low charges, daily dealing and the fact that the product is available as an Isa.”

Examining the drawbacks that the product provides, French says: “As with any other tracker fund, it will track down as well as up. It will also miss out on the performance of funds outside the FTSE TMT index.”

Hosking thinks: “Being a new vehicle there may be a slow uptake as there is little understanding of exchange-traded funds in the UK at present,” while Woodward says: “The main disadvantage is that if it has to be bought via a stockbroker and it isn&#39t one of the discount stockbrokers, then commission of 1.25 per cent purchase and sale could quickly negate the cost advantage over an index-tracking unit trust.”

Examining the investment strategy, the panel disagree. French says: “It is high risk – 75 per cent of the companies making up the fund are in the FTSE 100, but will provide the tech investor with a degree of protection rather than holding the tech stocks direct.”

Hosking says: “The investment strategy is at the higher end of the risk profile, tempered by being an index tracker across a broad range of companies in the UK.”

Rutter is lukewarm. He says: “The new FTSE TMT is largely untested. It remains to be seen whether this strategy works better than the more selective approach of a unit trust manager.”

Woodward says: “As an index tracking vehicle it does not have an investment strategy as such. It will be interesting to see how many other different component index trackers are offered in due course.”

Moving on to the reputation of iShares, Hosking says: “iShares is the market leader in this type of product and has secured the services of Barclays Global Investors (BGI) to manage the investments.”

Rutter says: “The backing of BGI, which has clearly learnt from its established time in exchange-traded funds in the US, bodes well. How ever, how many members of the public know of iShares?” Woodward adds: “iShares does not have wide recognition yet amongst retail clients and so on. With a tight cost base, there can&#39t be much scope for marketing the Barclays name, which would be more recognised. I am not sure how much reliance there will be on Barclays branches to promote this name to retail customers.”

Looking at some of the funds that provide competition to the product, French says: “As this is the first exchange-traded fund in the UK, the competition is scarce. I suppose investment houses offering tech funds may compete, as well as other tracker funds.”

Rutter says: “Competition is likely to come from one or two of the major unit trusts in this field, such as those from Aberdeen, SocGen and Investec.”

Examining the charges, Hosking says: “This is the big selling point. Annual charges here are extremely low at 0.5 per cent.” Rutter agrees. He says: “The charges are very fair and reasonable and compare well with those for unit trusts, Oeics and other tracker funds.”

Moving on to the product literature, the panel is cool. French says: “There is not enough of it – more information is needed. I know that you can get more information over the telephone, but I feel that coming from a new investment vehicle the brochure could have told me more.”

Woodward regards it as being functional but not very sales orientated, while Rutter says: “The appearance is good, but the content is geared more to stockbrokers and advisers than to investors.” Hosking thinks that it is professional and very clear.

Summing up, Rutter says: “iShares has the expertise through BGI to do well, but this not an immediately appealing product, other than to an experienced investor. How ever, there is no reason to suggest that exchange-traded funds will not be the norm in years to come.”

Woodward adds: “iShares is trying to replicate the success of exchange-traded funds in other countries. It is probably easier in the US because of the range of execution-only stockbrokers over there. Lots of retail investors in the UK have not used a stockbroker and so I think that there is some chance that this fund will be more successful with institutional type clients.” 


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