Exchange Traded Funds v2

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EXCHANGE TRADED

FUNDS


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INTRODUCTION & EVOLUTION


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Introduction

Save

Invest

Formation of Corpus fund for various objectives

Different Avenues : PPF, Mutual funds, Stocks, PostOffice schemes, Gold, Insurance, Real estate, ETFetc`.

Most Sought after Avenues: EPF, PPF, MF, Insurance


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Evolution

1989 - Toronto Index Participation Fund (TIP 35),Canada

1993S&P 500 Depository Receipts (SPDR), US

1999Hong Kong Tracker Fund , 1st in Asia 2001Euro STOXX 50, Europe


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Exchange Traded Fundsmix of a stock and a MF Like a MFset of specified stocksindex or commodity

Like equity sharetraded on Stock Exchanges on a realtime basis

ETF holds stocks, commodities and Bonds Example: Like the way you place an order with your stock

broker for say, 10 shares of State Bank of India (SBI) at Rs1500 per share and you need to pay Rs 15000 for that,Likewise, if Goldman Bees is trading at Rs 2800 per unit, you

need to pay Rs 28,000 for placing an order of 10 units ofGoldman Bees, which is a Gold ETF. This way you can investin ETF in India

What are Exchange traded Funds (ETFs)


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Total of 31 ETFs

Total ETF assets of Rs 8513 crores

Just one percent of total mutual fund assets

Corpus & net flowRs. 11,821 Cr., May 2012

Volumes:

EquityRs. 666 Cr., July 2012 vs. Rs. 1,189 Cr., June 2012

Gold ETFRs. 354 Cr.,

other ETFsRs. 312 Cr.

SIZE OF INDIAN ETF MARKET


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TREND IN ETF CORPUS

Category Corpus (Rs. Crores) as on

June12

March12

Dec. 11 June 11 June 10 June 09

Broader

IndicesETFs

1,086 1,041 986 1,397 697 361

SectorIndices

ETFs

93 95 86 185 68 204

Gold ETFs 10,086 9,886 9,153 5,568 1,939 844LiquidETFs

424 470 443 475 370 333


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SEGMENT BREAKUP OF TOTAL

TURNOVER

Gold ETFs (353,77 Cr)

Liquid ETFs (227.49 Cr)

Others (0.15 Cr)

Broader Indices ETFs

(79.76 Cr)Sector Indices ETFs(4.01 Cr)


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OPERATIONAL ASPECT


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CREATION OF AN ETF

Fund or TrustAuthorisedParticipant

Creationbasket and/orcash

One creationunit (e.g.50,000 shares

of an ETF)

HoldShares

Trade onan

exchange

Investors


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PROCESS FOR CREATION OF ETF UNITS

Files applicationwith regulator

Sponsor

Borrows sharesfrom institutionalinvestors

AuthorisedParticipant Places shares

with Custodian/Trust to formCreation Units

AuthorisedParticipants

Issues shares ofETF

TrustIssues shares toPublic foronwardtransactions

AuthorisedParticipant


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REDEMPTION OF AN ETF

Gets ETFsharesequivalent ofCreation Units

Authorised

Participant

Surrendersthe ETF sharesto Trust/Custodian

AuthorisedParticipant Exchangesthe ETF sharesfor CreationUnit securities

Trust

In-kindexchange

Less fees &costs

Trust


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TYPES OF ETFS

Equity

Gold

World Indices

Debt


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SCHEMES OF ETFSLISTEDON NSE

Equity:1. Goldman Sachs Nifty Exchange Traded Scheme2. Goldman Sachs Nifty Junior Exchange Traded Scheme3. Goldman Sachs Banking Index Exchange Traded Scheme4. Goldman Sachs PSU Bank Exchange Traded Scheme

5. Goldman Sachs S&P CNX Nifty Shariah Index Exchange TradedScheme6. S&P CNX Nifty UTI Notional Depository Reciepts Scheme (SUNDER)7. Kotak PSU Bank ETF8. Reliance Banking Exchange Traded Fund9. Quantum Index Fund10. Kotak Nifty ETF11. MOSt Shares M5012. Goldman Sachs Infrastructure Exchange Traded Scheme13. MOSt Shares M10014. Birla Sun Life Nifty ETF


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Gold:1. Goldman Sachs Gold Exchange Traded Scheme

2. Axis Gold ETF

3. UTI GOLD Exchange Traded Fund

4. HDFC Gold Exchange Traded Fund

5. ICICI Prudential Gold Exchange Traded Fund

6. Kotak Gold Exchange Traded Fund

7. Quantum Gold Fund (an ETF)

8. Reliance Gold Exchange Traded Fund

9. Religare Gold Exchange Traded Fund

10. SBI Gold Exchange Traded Scheme11. Birla Sun Life Gold ETF

12. IDBI Gold Exchange Traded Fund

13. Motilal Oswal MOSt Shares Gold ETF

14. Canara Robeco Gold Exchange Traded Fund


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World Indices:1. Goldman Sachs Hang Seng Exchange Traded Scheme

2. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Debt:

1. Goldman Sachs Liquid Exchange Traded Scheme


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MERITS

Enjoy flexibility of a stock and diversification of an index fund

Transaction at real time prices through terminals across thecountry

No separate form filling

Minimum trading lot of1 unit

Ability to put limit orders

Exit Load: Nil

Can short sell an ETF, which is not possible with conventionalfunds

Lower expense ratios than mutual funds Delivery in demat account

Provides arbitrage opportunities between Futures and CashMarkets


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DEMERITS

Underlying volatility

Transaction cost

Liquidity

Capital gains distribution SIP Investing

Dividend reinvestment


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Parameters ETFs Stocks MFs

Fund Size Flexible Flexible Fixed/ Flexible

NAV Real Time Real Time Daily

Liquidity Stock Market Stock Market Fund/ StockMarket

Uses Hedging,Arbitrage andInvestment

Hedging,Arbitrage andInvestment

Investment

Availability Exchange Exchange AMC

PortfolioDisclosure

Daily /Real Time Real Time Monthly

Intra day Possible at lowcost

Possible at lowcost

NA

ETFS VS STOCKS VS MFS


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Parameters ETFs Stocks MFs

Limit Orders Flexible Flexible Not Applicable

Diversificationwith a single unit

Possible Impossible Possible

Returns at par

with the market/index

Achievable Not Achievable Not Achievable

Documentation Paperless Paperless Agreement

Exit load NIL NIL Charged

ETFS VS STOCKS VS MFS


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COMPARISON ETFSVS. PHYSICAL GOLD.

Parameters GETF Jewelers Banks

Purchase & Salemode

Demat Form Bar/Coin/Jewellery

Bar/Coin

Security ofAssets

Taken care byfunds

InvestorsConcern

InvestorsConcern

Transparency Very High Very Low High

Impurity Risk Nil High Nil

Pricing(for retailinvestors)

Transparent willbe traded at

NSE

Neither standardnor transparent

Not standard.Huge

Selling back Sell back onexchange

Conditional andunconditional

Markup,10-15%ideally restricted

Bid Ask Spread Very low Very high Cant see back


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Parameters GETF Jewelers Banks

Denomination 1 gram and inmultiples of 1gram

Available instandarddenominations

Available instandarddenominations

Wealth Tax No Yes No

Long termCapital Gainstax

Applicable after1 year

Applicable after3 years

Applicable after3 Years

COMPARISON ETFSVS. PHYSICAL GOLD.


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GOLD ETFS


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PERFORMANCE OF GOLD ETFS


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BANK ETFS


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GOLDMAN SACHS NIFTY ETF


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The finance ministry is expected to take a finaldecision by this month-end on exchange tradedfund (ETF) for selling shares of state-owned firms aspart of steps to meet the disinvestment targetof Rs. 30,000 crore this fiscal. ETF in-principle hasbeen talked about, a top finance ministry officialtold PTI. There has been firming up certain views onthis. It is expected to be finalised during the month.

CURRENT SCENARIO AS OF 5THAUG 12


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Risks to consider include: tracking error why/how it exists

Liquidity

Premium/discount around NAV based on supply/demand factors why frontier market ETFs have not been popular

regulatory concerns

execution issues when index constituents changed

overseas trading (the effect of time zones)

Other issues to consider: fees/expenses

replication versus sampling

rebalancing rules (a degree of active management)

Education is key

RISKS INVOLVED


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CHALLENGES

Since ETFs not sold through distributorsspreadingawareness among investors for this class of asset

Indian stock market indices see frequent churn

of indices going in and out which forces thefund manager to sell the scrip that moves outof the index and buy the scrip that enters theindex

The ETF fund manager himself rebalances theportfolio; the scheme bears the cost

ETF can be as volatile as a normal security listed onthe Exchange


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CHALLENGES

Since ETFs not sold through distributorsspreadingawareness among investors for this class of asset

Indian stock market indices see frequent churn

of indices going in and out which forces thefund manager to sell the scrip that moves outof the index and buy the scrip that enters theindex

The ETF fund manager himself rebalances theportfolio; the scheme bears the cost

ETF can be as volatile as a normal security listed onthe Exchange


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There are many uses for ETFs

ETFs allow an investor to implement a variety ofstrategies and are especially popular for gainingemerging market exposure due to the inherent

characterisics its structure provides. As the local and global regulatory landscape changes,

choice matters.

When derivatives and other means dont work, ETFsshould be considered.

In time, as we have seen with the robust offerings fordeveloped market exposure, the same level of choice isnow being available for emerging markets.

CONCLUSION

Exchange Traded Funds v2

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