EXCHANGE TRADED FUNDS

Prepared By
Pavan Pandya Jigar Jain Jinesh shah

Introduction

Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts. Its just like as mutual fund schemes or index funds that are listed and traded on the exchange like stocks. ETFs Containing some price that can be bought or sold during the trading day. It can be bought or sold just by a call to the broker or through the internet trading account.
Pavan Pandya

This provides investors the power to changes in the market and place the limited orders in trading. ETFs do not sell individual shares directly to investors, It only issue their shares in large blocks that are known as "Creation Units." Investors generally do not purchase Creation Units with cash. Instead, they buy Creation Units with a basket of securities. After purchasing a Creation Unit, an investor sells the individual shares on a secondary market. This permits other investors to purchase individual shares instead of Creation Units.
Pavan Pandya

Structure of an ETF
PRIMARY MARKET SECONDARY MARKET

Buyer
ETF Units Cash

Arbitrage

Authorized Participants & Large Investors

Buy & Sell Market Making

Exchange
ETF Units Cash

Creation

Redemption

ETF Issuer

Seller

A BRIEF HISTORY OF ETFs

ETFs were launched in the year of 1987 with a view to overcome the lack of liquidity and intense program trading in the market.

The first ETF traded on a U.S. exchange was State Street (SPY) and it is currently the most heavily-traded security in the world.

Due to popularity of indexing in the 1990s, ETFs soon

became popular amongst individual investors and financial advisors as a transparent and liquid method of indexing.

As the availability of ETFs in different asset classes,

investment styles and geographic sectors, it made possible for investors to construct a well diversified portfolio at a very

low cost.

Pavan Pandya

FACTORS DRIVING ETF GROWTH

1

Large variety of indices of Equity, Fixed income, Commodity and other covered by ETFs
Facilitation of investor education & trading by large broking houses Special market campaigns by on-line brokers in an effort to win new accounts and cross-sell other products Major fund platforms embracing ETFs Regulatory changes in the US, Europe and many emerging markets that allow funds to make larger allocations to ETFs Development and growth of investment styles that employ products like ETFs that deliver low cost beta

KEY BENEFITS OF ETF

Cost Advantage

Broad Market Access

Broad Market Access

Diversified Exposure To Market

Hedging
Core/Satellite Investing

Buy And Hold Investing Alternative To Futures

Active Trading

Types of ETF
Index

ETF Commodity ETFs Liquid ETFs

Index ETF
Most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.
Jigar Jain

 Commodity

ETFs

Commodity ETFs invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries. The idea of a Gold ETF was first officially conceptualized by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002.
Liquid

ETFs

Liquid ETFs are the funds, whose unit price is derived from Money market securities comprising of government bonds treasury bonds, call money market etc.

Jigar Jain

GLOBAL ETF MARKET

$1,800 $1,600 Assets (USD Bn) $1,400 $1,200 ETF Assets 5000

4500
4000 3500 3000 2500 2000 1500

$1,000
$800 $600 $400 $200 $0

1000
500 0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Advantages And Disadvantages Of ETFs

Advantages

Diversification
One ETF can give exposure to a group of equities, market segments or styles. In comparison to a stock, the ETF can track a broader range of stocks, or even attempt to mimic the returns of a country or a group of countries.

Lower

Fees

Compared

to

Managed

Funds

Those ETFs, which are passively managed, have much lower expense ratios compared to other managed funds. A mutual fund's expense ratio is usually higher due to costs such as: a management fee, shareholder accounting expenses at the fund level.
Jinesh shah

Trades Like a stock

Although the ETF might give the holder the benefits of diversification, it still trades like a stock. ETFs can be purchased on margin and sold short.

Capital Gains Tax Exposure Is Limited

ETFs can be more tax-efficient than mutual funds because most of the tax on capital gains is paid on sale and completely up to the investor.

Lower

Discount

or

Premium

in

Price

There is a lower chance of having ETF prices that are higher or lower than the actual value ETFs trade throughout the day at a price close to the price of the underlying securities, so if the price is significantly higher or lower than the net asset value, arbitrage will bring the price back in line.
Jinesh shah

Disadvantages

May be limited to larger CompanyIn some countries, investors might be limited to large-cap stocks due to a narrow group of stocks in the market index.

Intraday Pricing might be overkill

Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes.

Cost could actually be higher

Most people compare trading ETFs with trading other pools of stocks, such as mutual funds, but if you compare ETFs to investing in a specific stock, then the costs are higher.
Jinesh shah

Dividend Yield There are dividend-paying ETFs, but the yields may not be as high as owning a high-yielding stock or group of stocks. The risks associated with owning ETFs are usually lower, but if an investor can take on the risk, then the dividend yields can be much higher.
Leveraged ETF Return Certain ETFs, which are double or triple leveraged, could result in losing more than double or triple the tracked index. These types of speculative investments need to be carefully evaluated.

Jinesh shah

Conclusion
So we can conclude that Exchange traded funds that can easily traded in the exchange market like stocks. This provides investors the power to have a change in the market and place the limited orders in trading.

Sources

http://etfdb.com/2009/etfs-vs-mutual-funds-five-trendsshow-that-etfs-are-winning/ http://economictimes.indiatimes.com/etfhome.cms

http://www.bseindia.com/markets/etf/ETF_faqs.aspx
http://www.nasdaq.com/investing/etfs/what-areETFs.aspx

THANK YOU