Post on 10-Jun-2015
description
KnowledgeHOUR
EXCHANGE TRADED FUNDS
YUVRAJ PATIL
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 2
ETFs are mutual funds that trade like a stock
Exchange Traded Fund (ETF)
– Simplicity– Transparency– Risk control– Diversification– Open-End Fund
Stock:– On Exchange– Trading flexibility– Trading strategies
+MUTUAL FUND STOCK
EXCHANGE TRADED FUND
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 3
ETF SETTLEMENT CYCLE
S. No. Day Time Activity
1. T - Trading day
2. T+1 1300 Custodial Confirmation
3. T+1 1430 Final Obligation download
4. T+2 1100 Securities and Funds pay-in
5. T+2 1330 Securities and Funds pay-out
6. T+2 - Auctions for shortages
7. T+3 - Securities Auction & Funds pay-in/pay-out
KnowledgeHOUR
ETF – A WORLD SCENARIO
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 5
A BRIEF HISTORY OF ETFs ETFs were launched post the 1987 crash to overcome the lack of liquidity and intense
program trading in the market
The first ETF traded on a U.S. exchange was StateStreet’s SPDR (SPY), which was
introduced in 1993. SPY tracks the S&P 500 Index and 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 which was
also better than index mutual funds
As the availability of ETFs grew for different asset classes, investment styles and
geographic sectors, it made possible for investors to construct a well diversified portfolio
at a very low cost
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 6
GLOBAL ETF MARKET
Source: http://www.blackrockinternational.com (Nov-12)
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
$0.80
$1,677
3
4542
ETF Assets # Total ETFs
Ass
ets
(USD
Bn)
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 7
ASIAN ETF MARKET
Source: http://www.blackrockinternational.com
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0
$20
$40
$60
$80
$100
$120
0
100
200
300
400
500
600
$10
$111
12
491
ETF Assets # Total ETFs
USD
Bill
ion
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 8
KEY BENEFITS OF ETF
• The challenging market conditions in 2008-09 caused a significant shift in investors’ risk appetite and in their desire for liquidity. ETFs met their need for greater transparency regarding cost, holdings, price, liquidity, product structure, and risk and return.
Diversified Exposure To Market
Buy And Hold Investing
Active Trading Alternative To Futures*
Cost Advantage
Broad Market Access
Easy to Implement
any Inv. Strategy
Core/Satellite Investing
Hedging
* For ETFs in US markets where the underlying is futures
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 9
FACTORS DRIVING ETF GROWTH
1
2
3
4
5
6
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 many 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
KnowledgeHOUR
ETF – THE INDIAN STORY
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 11
INDIAN ETF MARKET
* Average Quarterly AUM Source www.amfiindia.com
Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-120
2000
4000
6000
8000
10000
12000
14000
0
5
10
15
20
25
30
35
AUM Gold ETF AUM Other ETF #ETF
AU
M (I
NR
Cror
e)
Num
ber o
f ETF
s
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 12
ETFs IN INDIA
• Gold ETF
• Liquid ETF
• Index ETF
– Nifty
– Junior Nifty
– Bank Nifty
– PSU Banks
– Shariah
• International Index ETF
– Hang Seng
– S&P CNX 500
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 13
ETFs: BENEFITS FOR THE RETAIL INVESTOR
1
2
3
4
5
Very Simple to Trade: Can be traded on NSE like any stock
Quick Diversification: Opens up multiple asset classes are affordable costs
Economical: Lowest expense ratio amongst all equity mutual funds
Only brokerage payable in buying or selling on exchange
You can track your investment value in real time
Safe
Simple
Fast
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 14
TYPICAL INVESTMENT PATTERN
Fixed Income Investment
Equity Investment
Bank Savings
Account
Fixed Deposits
Provident Funds
Cash Holdings
Few Stocks or Mutual
Funds
• This is a typical salaried individual’s investment pattern
• As we can see it is heavily tilted towards fixed income products, including his retirement savings
• This lopsided investment pattern exposes the individual to the risk of inflation and inefficient utilization of his assets
• There is a strong need to rebalance the portfolio to improve the returns and counter the risk of inflation
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 15
CORRECTING THE INVESTMENT TILT
• The best way to correct this is – To participate in the economic growth by a broad
exposure to the Indian markets– To include gold in portfolio to hedge against the
inflationary pressures– To insure against distress situations by investing in gold
• The Nifty 50 offers you an avenue to participate in the growth of Indian economy and benefit from the same
• Nifty ETF is a simple and economical way to invest in the Nifty
• Gold investment is at its simplest with Gold ETFs• They allow investors to accumulate pure gold as
and when they are ready for it.
NIFTY ETF
GOLD ETF
SAFE SIMPLE SECURE
KnowledgeHOUR
NIFTY ETF
KnowledgeHOUR
NATIONAL STOCK EXCHANGE
NIFTY ETF
– Blue chip stocks
– Well diversified
– Highly liquid
– Represents Indian business economy
Why NIFTY?
– Direct investment in benchmark index
– Lower Cost
– More Transparency
– More Flexibility
– Small ticket size
Why NIFTY ETF?
Nifty ETF is the simple and safe way to access equity markets
17
Jan-94 Dec-95 Nov-97 Oct-99 Sep-01 Aug-03 Jul-05 Jun-07 May-09Apr-110
1000
2000
3000
4000
5000
6000
7000
Jan-94 1083.74
Dec-12 5870.95
S&P CNX Nifty Index
KnowledgeHOUR
NATIONAL STOCK EXCHANGE
NIFTY ETF: A COMPARISON
Narrow Broad Broad
High Low Low
Low High Low
High Low Low
Market Rates NAV at EOD Market Rates
Yes No Yes
No May Be Yes
Yes No Yes
STOCKS NIFTY MUTUAL FUND
NIFTY ETF
EXPOSURE
VOLATILITY
EXPENSE
CAPITAL REQ
PRICE
ARBITRAGE
MARKET RETURNS
INTRADAY TRADING
18
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 19
NIFTY ETF: KEY BENEFITS
1
2
3
4
5
6
Simple: Can be traded on NSE like a stock
Instant Diversification: Single scrip to trade in a broad Indian market
Economical: Lowest expense ratio amongst all equity mutual funds
Auto Balancing: No need to rebalance portfolio after corporate actions
No costs other than brokerage are payable in buying or selling on exchange
You can track your investment value in real time
Safe
Simple
Fast
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 20
NIFTY ETF – SPECIFICATIONS
Type of fund Equity ETF
Investment In basket of securities replicating the S&P CNX NIFTY index
Taxation treatment Equity
Pricing per Unit ~ 1/10th of Index
Tick Size INR 0.01
Minimum Lot (on Exchange) 1 unit
Minimum Lot (Direct) 10000 units
Expense Ratio ~ 0.50 %
Trading hours Same as cash market
Price Market determined, tracks NAV
Trade cycle T+2
Allocation Pattern
Securities covered by S&P CNX Nifty Index Upto 100%
Money market, securitized debts, bonds and cash at call 0 – 10%
KnowledgeHOUR
GOLD ETF
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 22
WHY INVEST IN GOLD ?
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 23
0 5,000 10,000 15,000 20,000 25,000 30,000 35,0000
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Price of 10 Grams of GoldPric
e of
Bas
ket o
f Goo
ds
Correlation = 94%
• If we look at the inflation data, represented here by the price of a fixed basket of goods, against the gold prices, we will see that these have a very high correlation
• Which means that any rise in the inflation will be reflected in the rise in gold price
Source: Inflation data (Historic Inflation Rates for India http://www.inflation.eu) & Gold Price (Annual Average Prices in INR www.gold.org)
GOLD IS A HEDGE AGAINST INFLATION
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 24
WHY INVEST IN GOLD
EVEN DURING PERIODS OF CRISES,
GOLD HAS BEEN A SAFE HAVENInvesting in gold is similar to holding insurance for uncertain times
-150
-100
-50
0
50
100
150
200
Pe
rce
nt
Re
turn
s
Great De-pression
World War 2
Arab Oil Embargo
Japanese Stock Bubble
Asian Crisis
Dotcom Bust
Sub Prime Crisis
19291929 198919891973197319391939 200720072000200019971997
Gold ReturnsEquity
Returns
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 25
WHY INVEST IN GOLD
GOLD IS A FUNDAMENTALLY DIFFERENT ASSETECONOMICALLY SECURE
ASSET
INCONTROVERTIBLE LIQUIDITY
HIGH PUBLIC OCNFIDENCE
An asset which is no one’s liability
HenceNo risk of inflationNo risk of repudiation
Unaffected by exchange controls or asset freezes
Most central banks have increased gold as a percentage of total reserves in the previous decade
0%
10%
20%
30%
40%
50%
60%
70%
80%
-20%
-10%
0%
10%
20%
30%
40%
50%
21%
39%
31%
26%
2%
2%
-15% 0% -2%
20002012
Gold as a Percentage of National Reserves
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 26
WHY INVEST IN GOLD ETF?
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 27
GOLD ETFW
hat m
akes
it a
ttra
ctive
?G
old
ETF
Unit of Dematerialized Gold
Lists and trades on a stock exchange
Every ETF unit is backed by physical gold
Efficient
No wastage, impurities & extra charges
Tax Efficient
Tax efficient way to hold gold
Convenient
Can be purchased in small lots, typically 1 gram
Transparent
Transparent real time prices
SIMPLE
SAFE
TRUSTED
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 28
GOLD ETF: KEY BENEFITS
1
2
3
4
5
6
7
Your ETFs are backed by high quality physical gold
Your gold is safely stored in highly secure vaults
Lots of 1000 gm equivalents can be converted into physical gold
You can sell yours ETFs on the exchange like a share
No costs other than brokerage are payable in buying or selling on exchange
No wealth tax unlike physical purchase, also LTCG benefit available after one year
You can track your investment value in real time
Pure
Safe
Easy
Fast
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 29
GOLD ETF – SPECIFICATIONS
Type of fund Non Equity ETF
Investment In underlying physical gold
Taxation treatment Debt
Unit ~1 gm of gold, typically
Tick Size INR 0.01
Minimum Lot (on Exchange) 1 unit
Minimum Lot (Direct) 1000 units
Expense Ratio ~ 1.00 %
Trade hours Same as cash market
Price Market determined, tracks NAV
Trade cycle T+2
Allocation Pattern
Gold 90 – 100%
Money market, securitized debts, bonds and cash at call 0 – 10%
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 30
GOLD ETF: CREATION UNIT & NAV
UNIT CREATION
One creation unit =
1 kg of Physical Gold +
Cash Component
Units in 1 Creation Unit 1000NAV per unit INR 2025
Value of one creation unit INR 2,025,000Value of 1 kg Gold INR 2,050,000Cash Component1 INR - 25,000
Market Value or Fair Value of Schemes Investments2
Net Current Assets (including accrued expenses)+
Number of Units Outstanding as on Valuation Date
NAV (INR) =
NAV COMPUTATION
1 Cash Component will vary depending upon the actual charges incurred like Custodial Charges and other incidental charges for creating units2 Valuation of investments will be done as specified by the issuer in the Scheme Document
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 31
LISTED GOLD ETFsName Inception AUM
(INR Crores) Unit Size (gm)
Goldman Sachs Gold ETF Feb-07 3,023 1 Reliance Gold ETF Nov-07 2,899 1 Kotak Gold ETF Jul-07 1,135 1 SBI Gold ETS Apr-09 988 1 UTI Gold ETF Mar-07 701 1 HDFC Gold ETF Jul-10 687 1 Axis Gold ETF Nov-10 292 1 ICICI Prudential Gold ETF Jul-10 182 1 IDBI Gold ETF May-11 119 1 Birla Sun Life Gold ETF Nov-11 116 1 Religare Gold ETF Feb-10 71 0.5 Quantum Gold Feb-08 48 1 Canara Robeco Gold ETF Mar-12 47 1 Motilal Oswal MOSt Shares Gold ETF Mar-12 27 1
TOTAL 10037
* The AUM as on Sep 2012 (Source: www.valueresearchonline.com)
KnowledgeHOUR
THANK YOU
KnowledgeHOUR
ANNEXURES
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 34
Annexure 1: The Unit Creation of an ETF
CREATION UNIT
Creation Unit
=
Portfolio Deposit
+
Cash Component
1 Cash Component will represent accrued Dividends, accrued annual charges including management fees and residual cash in the Scheme. It will also include transaction cost as charged by the Custodian/ Depositary Participant, equalization of Dividend and other incidental expenses for Creating Units. It will also include Entry Load, as may be levied by the Fund from time to time and statutory levies, if any.
A pre-defined basket of Securities that represent the underlying index or gold as announced by the Fund on daily basis
The Cash Component represents the difference between the Applicable NAV of a Creation Unit and the market value of the Portfolio deposit.
UNIT CREATION PROCESS
The requisite Securities or gold constituting the Portfolio Deposit of the scheme have to be transferred to the Fund’s DP account (or vault) while the Cash Component has to be paid to the Custodian/AMC
On confirmation of the same by the Custodian/AMC, the AMC will transfer the units of the Scheme into the investor’s DP account
A fixed number of units of the scheme, which is exchanged for a basket of shares underlying the index(or gold) and cash
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 35
Structure of an ETF
Redemption
PRIMARY MARKET SECONDARY MARKET
Authorized Participants & Large Investors
ETF Issuer
Buyer
Exchange
Seller
Buy & Sell
Market Making
Arbitrage
Creation
Cash
ETF Units
Cash
ETF Units
* Creation & Redemption of ETF units is done only in integral multiples of creation units.
KnowledgeHOUR
NATIONAL STOCK EXCHANGE 36
The NAV of an ETF
Market Value or Fair Value of Schemes Investments
Net Current Assets (including accrued expenses)+
Number of Units Outstanding as on Valuation Date
NAV (INR) =
NAV COMPUTATION
Note for Valuation for Gold:
The gold held by the Scheme shall be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for gold having a fineness of 995.0 parts per thousand, subject to the following
adjustment for conversion to metric measures as per standard conversion rates
adjustment for conversion of US dollars into Indian rupees as per the RBI reference rate