Outspoken City veteran Terry Smith, whose asset management venture Fundsmith launched last year, has used his first letter to investors to warn of the perils of misunderstanding ETFs – traditionally considered one of the most simple and transparent ways of investing in equities.

Traditional ETFs track an index, a commodity or a basket of assets, but trade like stocks. By the third quarter of 2010 there were 2,379 ETFs across 45 exchanges that managed over $1 trillion.