7. Exchange Traded Funds

7/31/2019 7. Exchange Traded Funds

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Exchange Traded Funds

Presented by:

Kriti Varshney

Mohita Sud

Vaibhav Kumar

Ankur

Kapil Sharma

Anusha Gupta


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Exchange Traded Funds (ETFs) are open endedmutual funds.

ETFs can be traded like stock on the major stock

exchanges.

ETF holds assets such as stocks, commodities,

or bonds, and trades close to its net asset

value over the course of the trading day

Unlike closed-end funds, the number of ETFshares can change daily

ETFs track an index, such as the S&P

500 or MSCI EAFE

What are ETFs?


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Intraday portfolio values are calculated every fifteenseconds

It combines valuation feature of mutual fund or unit

trust investment which trades throughout the trading

day at prices that may be more or less than its netasset value

ETFs may be attractive as investments because of

their low costs, tax efficiency, and stock-like features

authorized participants (typically, large institutionalinvestors) actually buy or sell shares of an ETF

directly from or to the fund manager

Contd


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ETFs had their genesis in 1989 with IndexParticipation Shares, an S&P 500 proxy that tradedon the American Stock Exchange andthe Philadelphia Stock Exchange.however thisproduct was shortlived after a lawsuit by the Chicago

Mercantile Exchange in stopping sales in the UnitedStates

In 1990, Toronto Index Participation Shares, startedtrading on the Toronto Stock Exchange which trackedthe TSE 35 and later the TSE 100 stocks, proved tobe popular. The popularity of these products led the

American Stock Exchange to try to developsomething that would satisfy SEC regulation in theUnited States.

History


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In january 1993, Nathan and Steven Bloom, executives with theexchange, designed and developed Standard & Poor's Depositary

Receipt introduced SPDRs or "Spiders

In 1996, Barclays Global Investors, a subsidiary of Barclays plc,

entered the fray with World Equity Benchmark Shares, orWEBS, subsequently renamed iShares MSCI Index Fund Shares

WEBS gave casual investors easy access to foreign markets.

n 1998, State Street Global Advisors introduced the

"Sector Spiders", which follow the nine sectors of the S&P

500. Also in 1998, the "Dow Diamonds" (NYSE: DIA) wereintroduced, tracking the famous Dow Jones Industrial Average .

Contd. shareCo.

name


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In 1999, the influential cubes were launched attempting toreplicate the movement of the NASDAQ-100

In 2000 Barclays Global Investors put a significant effort behind

the ETF marketplace, with a strong emphasis on education and

distribution to reach long-term investors Barclays Global Investors was sold to BlackRock in 2009

As of September 2010, there were 916 ETFs in the U.S., with

$882 billion in assets, an increase of $189 billion over the

previous twelve months.

Contd.


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How does ETFs work in India

A fund manager needs to do is establish clearprocedures and describe the composition of theETF to the other firms involved in ETF creationand redemption.

The creation of an ETF officially begins with anauthorized participant, also referred to as amarket maker or specialist.

Highly scrutinized for their integrity and

operational competence, these middlemenassemble the appropriate basket of stocks andsend them to a specially designated custodialbank for safekeeping.


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The custodial bank double checks that the basketrepresents the requested ETF and forwards theETF shares on to the authorized participant. Thisis a so-called in-kind trade of essentially

equivalent items that does not trigger capitalgains for investors.

The custodial bank holds the basket of stocks inthe fund's account for the fund manager tomonitor.

This flow of individual stocks and ETF certificatesgoes through the Depository Trust Clearing Corp.,


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It provides an extra layer of assurance againstfraud.

Once the authorized participant obtains the ETFfrom the custodial bank, it is free to sell it into the

open market. Redemption is simply the reverse. An authorized

participant buys a large block of ETFs in the openmarket and sends it to the custodial bank and in

return receives back an equivalent basket ofindividual stocks which are then sold on the openmarket or returned to their loonies.


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Difference between mutual funds and

ETFs

ETFs, are similar to mutual funds because bothinstruments bundle together securities in order to

offer investors diversified portfolios.

ETFs Mutual Funds

Trade during trading day Trade at closing NAV

Low operating expenses Operating expenses vary

No investment minimums Most have investment

minimums

Tax-efficient Less tax-efficient

No sales loads May have sales load


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Types Of ETFs

Index ETFs

Commodity ETFs or ETCs

Bond ETFs

Currency ETFs or ETCs

Actively managed ETFs

Leveraged ETFs


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ETFsAdvantages

Diversification

Trading similarly to a stock

Transparency

Cost effectiveness

Tax savings


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ETFsDisadvantages

Only a narrow-based market index tracked in some

countries Intraday trading opportunity is not important for

long-horizon investors.

Large bid-ask spreads on some ETFs.

Possibly better cost structures and tax advantagesto direct index investing for large institutions.


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ETFs Risks

Market Risk

Trading Risk

Tracking error risk

Foreign Exchange Risk


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What are Gold ETFs ?

Gold ETFs are open-ended mutual fundschemes that will invest the money collected from

investors in standard gold bullion (0.995 purity).

The investor's holding will be denoted in units,

which will be listed on a stock exchange

These are passively managed funds.

Gold bees was the first company to launch gold

ETF in india on MAR 2007.


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Investors

Reliance

Mutual Fund

Fund

DematA/c of

Investors

Custodian

Custodian

Working of a Reliance Gold ETF During

NFO

Minimum investment amount of Rs 5000/-& in

multiples of Re 1/- thereafter.

Reliance MF buys gold

& deposits it with

the custodian.

The units allotted will be credited to the

depositary account of the investors.


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going

Secondary market

Market making / cash

Arbitrage

Buy/SellCreation in Redemption in cash

cash/gold cash/ gold

1Authorized participants & large investors can directly deal

with Reliance MF only in creation unit size & multiple

thereof.

2 Each unit of Reliance gold ETF will be approx equal

to 1 gram of gold

Seller

StockExchange

Buyer

Authorized

Participants

Reliance Mutual

Fund


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Investor Requirements for trading inGold ETF

Trading account with a stock exchange broker.

Demat account as Gold ETF can be traded onlyin demat form.


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Basic terms involved into Gold ETF

NAV :- Stands for the Net Asset Valuedeclared everyday by Asset ManagementCompany which manages the ETF .It iscalculated by dividing the total value of

portfolio less any liabilities, by the number offund ETFs outstanding.

BID :- The Price at which the investors wantto buy Gold ETF.

ASK :- The Price at which the investors wantto sell Gold ETF.


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Why should an investor invest in

Gold ETF No worry on adulteration.

Gold is considered to be less volatile compared to

equities.

Extremely Liquid.

Gold is used as a Hedge against Inflation.

Gold provides diversification to the portfolio.

Held in Electronic Form.


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Sr

no Parameter

Jeweller Bank Gold ETF

1 How Gold is

held ?

Physical (Bars /

Coins)

Physical (Bars

/ Coins)

Dematerialized

(Electronic

Form)

2 Storage

Requirement

Locker / Safe Locker / Safe Demat Account

3 Quantity to

Buy / Sell

Available in

standard

denomination

Available in

standard

denomination

Minimum is

or 1 gram

according to

the fund4 Wealth Tax Yes Yes No

5 Long Term

Capital Gains

Tax

Only after 3

years

Only after 3

years

After 1 year

Comparison of Gold ETF with Physical

Gold


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Gold ETF Companies in India

Sr no Name NSE Ticker Turnover inLacs as onAug 12 2011

ExpenseRatio

1 Quantum QGOLDHALF 37.11 1.25%2 UTI GOLDSHARE 341.833 SBI SBIGETS 397.374 Axis AXISGOLD 15.245 HDFC HDFCMFGETF 288.75 1.00%6 Relianace RELGOLD 440.827 Religare

RELIGAREGO

9.9

1.00%

8 Benchmark GOLDBEES 5,490.42 1.00%9 ICICI Prudential IPGETF 14.1710 Kotak KOTAKGOLD 1,042.38 1.00%11 Birla Sunlife BSLGOLDETF 1.64


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Risk Involvement

Mutual Funds and Securities investments are subject

to market risks and there can be no assurance or

guarantee that the objective of the scheme will be

achieved. The scheme NAV will react to the Bullion Market

movements. The investor could lose money over

short periods due to fluctuation in the schemes .

Investors are not offered any guaranteed or assuredreturns.

ETFs are a new concept in India compared to other

parts of the world.


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Thank You

7. Exchange Traded Funds

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