etf golden globe

8/8/2019 ETF Golden Globe

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EXCHANGE TRADED FUNDEXCHANGE TRADED FUND



What are ETFs?What are ETFs?

ETFs are a basket of securities that are

listed and traded on a recognized stock

exchange. They are mutual funds, whose units can

be bought and sold on the stock

exchange.

ETFs can be either passively managed or

actively managed.



CONTI«

In a survey of investment professionals

conducted in March 2008, 67% called ETFs the

most innovative investment vehicle of the last

two decades and 60% reported that ETFs havefundamentally changed the way they construct

investment portfolios.



Types of ETFTypes of ETF

A passively managed ETF attemptsA passively managed ETF attempts ± To replicate the performance of its underlying benchmark index

(like the S&P CNX Nifty, for instance).

± It invests in the same stocks as the index and in the same

weightage as well. ± The intention is to track the index as closely as possible (i.e. with

least deviation).

An actively managed ETFAn actively managed ETF ± Can freely invest in stocks/securities, within the guidelines laid

down by its investment mandate. ± In other words, the fund has no obligation to invest in the same

stocks/securities as its benchmark index.

± The intention is to outperform the benchmark index.



Conti«

Index ETFsIndex ETFs

Commodity ETFsCommodity ETFs

Currency ETFsCurrency ETFs

ExchangeExchange--traded grantor tr uststraded grantor tr usts ± An exchange-traded grantor trust share represents a direct interest in a

static basket of stocks selected from a particular industry. The leading

example is Holding Company Depositary Receipts, or HOLDRS, a

proprietary Merrill Lynch product.



ETFs in India ETFs in India

ETFs first made their presence felt in India in the year 1994 with the launch of Morgan Stanley Growth Fund, aclose-ended, actively managed, diversified equity fund.

Things changed after the launch of Nifty BenchmarkExchange Traded Scheme-Nifty BeES (launched inDecember 2001), an open-ended, passively managedfund.

The fund set the records straight for ETFs in the country.Since then, the ETF segment has grown slowly butsteadily.

The launch of gold ETFs has provided the much neededzing to the segment, thus attracting many investors.



Conti«

ETFs at present have a fair variety to offer.

± For example, among others, there are ETFs like

Quantum Index Fund and ICICI SPIcE Fund that track

broad indices such as the S&P CNX Nifty and theBSE Sensex respectively.

± Then there is Bank BeES (from Benchmark Mutual

Fund), an ETF that tracks CNX Bank Index.

± On the debt side, there is Liquid BeES that invests ina basket of call money, short-term government

securities and money market instruments.



How ETFs function How ETFs function

Given that an ETF is traded on the stock exchange, itsprice may not necessarily be the same as the N AV of theunderlying portfolio.

In other words, an ETF could have an N AV distinct from

its market price. The reason being that the market priceis usually driven by the demand and supply of units.Hence there is a distinct possibility of an ETF¶s unitstrading at a premium or discount to its N AV.

Unlike regular mutual funds, where the investor dealsdirectly with the AMC (asset management company), incase of ETFs, a bulk of the buying and selling is doneover the stock exchange.

Direct dealing with the AMC is possible only if thetransaction is done in specified lot sizes known asµcreation units¶.



Conti«.Conti«.

AMCs attempt to keep the market price of the ETF close to its N AV;

for this purpose, they appoint institutions commonly ref erred to asref erred to as

market maker s.market maker s.

These market makers try to benefit from any premium or discount

between the ETF¶s market price and its N AV, by performing anarbitrage between the ETF and its underlying portfolio.

So how does this mechanism work?

± If an ETF is trading at a discount to its N AV, then the market maker will

buy ETF units from the stock market and then sell the same to the AMC

(in creation units); after taking delivery of the underlying stocks, the

market maker will sell the same in the stock markets, thereby benefiting

from the arbitrage opportunity. The converse will be done when an ETF

is trading at a premium to its N AV. The arbitrage mechanism helps to

keep the market price of an ETF close to its N AV



Advantages of ETFsAdvantages of ETFs

ETFs tend to be more cost-eff ective vis-à-viscomparable mutual funds.

Another important advantage with ETFs is that theypr ovide more f lexibility to investor s than regular mutual funds.

Since ETFs witness most of the buying/selling on theexchange, the interests of the long-ter m investor are not compr omised.

With an ETF, since the trading investor does notapproach the AMC at all and only interacts with other

investors over the exchange, his quick entry/exit does notcompromise the interests of the long-term investor.

ETFs are traded on the stock exchange, and can bebought/sold on a real time basis; they tend to have lowtracking err or (deviation of ETF's performance from thatof the underlying index) as compared to index funds.



Conti«Conti«

Tax efficiencyTax efficiency ± ± ETFs generally generate relatively low capital gains, because

they typically have low turnover of their portfolio securities.

TransparencyTransparency-- ± ETFs, whether index funds or actively managed, have

transparent portfolios and are priced at frequent intervals

throughout the trading day.



Disadvantages of ETFDisadvantages of ETF

Investor s need to have a demat and a trading account, with a SEBI registered stockbroker, for investing in ETFs.

While investors have to incur entry/exit loads at the timeof making/redeeming investments in mutual funds, for ETFs they have to pay a br okerage (usually around0.50%) to the stockbroker, along with other applicablecharges (STT for instance), every time ETF units are

bought or sold. For a trader who frequently trades, thiscan have a significant impact on the net returns. But for long-term investors, these expenses hold little relevance.



Thank YOU

etf golden globe

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