Simple ETF Questions

Simon_Brown_2

Please forgive my ignorance.
I've done a bit of internet searching, but still not entirely clear on these details:

Is the percentage holding of an ETF fixed?
For example, a supermarket ETF says it holds 20pc Tesco, 10pc Sainsbury, 5pc Morrisons.
Will these percentages stay fixed, as the share prices go up and down?

Also,
Are all ETFs passive?
Are ETFs 'closed-ended? (ie like Investment Trusts?)

Both ETFs and ITs are traded on the stock-exchange. What is the difference between the two? Is it that ITs are closed and active, whilst ETFs are closed and passive?

Many thanks,

Simon

jaybeetoo

How often ETFs rebalance depends on the ETF. Some do it daily, other less often. You need to read the product literature for the ETF you’re interested in.

https://www.telegraph.co.uk/investing/funds/dont-know-difference-etf-oeic-fund-jargon-explained/

Simon_Brown_2

jaybeetoo wrote: »

How often ETFs rebalance depends on the ETF. Some do it daily, other less often. You need to read the product literature for the ETF you’re interested in.

Thanks.

So the proportions of each holding (eg 20pc Tesco) are set in advance by the ETF managers?
They usually seem to have the largest proportions in the large cap companies and then reduce the proportions of the smaller companies they hold.
Presumably this is a strategy to reduce risk, by not holding the riskier smaller companies in the same proportions as the safer larger ones?

But doesn't this mean that as a smaller company grows larger and it's share price increases, the ETF will automatically sell it's shares in that company, in order to keep it at a low proportion to the total ETF holdings?

Hope I've made sense!

short_butt_sweet

Simon_Brown wrote: »

So the proportions of each holding (eg 20pc Tesco) are set in advance by the ETF managers?
They usually seem to have the largest proportions in the large cap companies and then reduce the proportions of the smaller companies they hold.

it depends what index the ETF is tracking (and there are even a few ETFs which don't track an index! ... in which case, it depends on what the ETF's strategy is).

but the most common strategy is to follow a market-capitalization-weighted index. this kind of index doesn't assign a fixed proportion to each company. it just buys the same percentage of the available shares in each company. so e.g. an ETF could end up buying 1% of the shares in every company in the index. 1% of the shares in a bigger company is worth more than 1% of the shares in a smaller company, which is why they put more money into bigger companies.

as a smaller company grows (or rather: if it grows ...), it will make up a bigger proportion of the index, and of the ETF's holdings. but the ETF doesn't need to sell any shares in it as a result (nor to buy any more), because it still has the correct holding in virtue of owning 1% of the company's shares, the same as it has for every other company in the index.

Simon_Brown_2

short_butt_sweet wrote: »

it depends what index the ETF is tracking (and there are even a few ETFs which don't track an index! ... in which case, it depends on what the ETF's strategy is).

but the most common strategy is to follow a market-capitalization-weighted index. this kind of index doesn't assign a fixed proportion to each company. it just buys the same percentage of the available shares in each company. so e.g. an ETF could end up buying 1% of the shares in every company in the index. 1% of the shares in a bigger company is worth more than 1% of the shares in a smaller company, which is why they put more money into bigger companies.

as a smaller company grows (or rather: if it grows ...), it will make up a bigger proportion of the index, and of the ETF's holdings. but the ETF doesn't need to sell any shares in it as a result (nor to buy any more), because it still has the correct holding in virtue of owning 1% of the company's shares, the same as it has for every other company in the index.

Thank you.

But in your example, do you mean that the ETF would purchase shares in each company up to the value of 1pc of the total ETF or 1pc of the company?

eg would the ETF buy 1pc of all the Tesco shares been issued - so that the ETF owns 1pc of Tesco?

Or would the ETF allocate 1pc of its total fund to purchase that amount of Tesco shares? (ie ETF total value = £100 million, therefore ETF allocates £1 million to buy Tesco shares)

Hope I've explained my question ok?

Thanks.

lpgm

Simon_Brown wrote: »

do you mean that the ETF would purchase shares in each company up to the value of 1pc of the total ETF or 1pc of the company?

The fund buys each company in proportion to that company's share of the index at a particular moment in time, and then, all else being equal, it sits back and does nothing. If there are later net buyers or sellers of the fund - which of course there will be! - it buys or sells in proportion to the current make-up of the index.

short_butt_sweet

Simon_Brown wrote: »

But in your example, do you mean that the ETF would purchase shares in each company up to the value of 1pc of the total ETF or 1pc of the company?

the latter.

lpgm wrote: »

It's neither. The fund buys each company in proportion to that company's share of the index at a particular moment in time

your statement is accurate. however, it is also correct that, for an ETF which follows a cap-weighted index, the end result is that it will end up holding the same percentage (e.g. 1%) of the available shares in each company in the index (e.g. 1% of available tesco shares, 1% of available BP shares, ..).

Simon_Brown_2

short_butt_sweet wrote: »

the latter.

your statement is accurate. however, it is also correct that, for an ETF which follows a cap-weighted index, the end result is that it will end up holding the same percentage (e.g. 1%) of the available shares in each company in the index (e.g. 1% of available tesco shares, 1% of available BP shares, ..).

Surely that can only be possible if the ETF has enough money to own 1pc of each company in the index it follows?

short_butt_sweet

Simon_Brown wrote: »

Surely that can only be possible if the ETF has enough money to own 1pc of each company in the index it follows?

yes. it will buy whatever percentage of each company it can with the money it has. but the point is that it will end up buying the same percentage of each company. which could be 1%, or 0.1%, or 0.000000432432% ... but will be the same percentage for each company.