You are on page 1of 24

Exchange Traded Funds

Presented by: Kriti Varshney Mohita Sud Vaibhav Kumar Ankur Kapil Sharma Anusha Gupta

What are ETFs?


Exchange Traded Funds (ETFs) are open ended

mutual 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 ETF shares can change daily ETFs track an index, such as the S&P 500 or MSCI EAFE

Contd
Intraday portfolio values are calculated every fifteen

seconds 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 net asset value ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from or to the fund manager

History
ETFs

had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange.however this product was shortlived after a lawsuit by the Chicago Mercantile Exchange in stopping sales in the United States In 1990, Toronto Index Participation Shares, started trading on the Toronto Stock Exchange which tracked the TSE 35 and later the TSE 100 stocks, proved to be popular. The popularity of these products led the American Stock Exchange to try to develop something that would satisfy SEC regulation in the United States.

Contd.

share Co. name

In january 1993, Nathan and Steven Bloom, executives with the

exchange, 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, or WEBS, 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) were introduced, tracking the famous Dow Jones Industrial Average .

Contd.

In 1999, the influential cubes were launched attempting to replicate 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.

How does ETFs work in India


A fund manager needs to do is establish clear

procedures and describe the composition of the ETF to the other firms involved in ETF creation and redemption. The creation of an ETF officially begins with an authorized participant, also referred to as a market maker or specialist. Highly scrutinized for their integrity and operational competence, these middlemen assemble the appropriate basket of stocks and send them to a specially designated custodial bank for safekeeping.

The custodial bank double checks that the basket

represents the requested ETF and forwards the ETF shares on to the authorized participant. This is a so-called in-kind trade of essentially equivalent items that does not trigger capital gains for investors. The custodial bank holds the basket of stocks in the fund's account for the fund manager to monitor. This flow of individual stocks and ETF certificates goes through the Depository Trust Clearing Corp.,

It provides an extra layer of assurance against

fraud. Once the authorized participant obtains the ETF from 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 open market and sends it to the custodial bank and in return receives back an equivalent basket of individual stocks which are then sold on the open market or returned to their loonies.

Difference between mutual funds and ETFs


ETFs, are similar to mutual funds because both

instruments bundle together securities in order to offer investors diversified portfolios.

ETFs Trade during trading day Low operating expenses No investment minimums Tax-efficient No sales loads

Mutual Funds Trade at closing NAV Operating expenses vary Most have investment minimums Less tax-efficient May have sales load

Types Of ETFs
Index ETFs Commodity ETFs or ETCs Bond ETFs Currency ETFs or ETCs Actively managed ETFs Leveraged ETFs

ETFs Advantages

Diversification Trading similarly to a stock Transparency Cost effectiveness Tax savings

ETFs Disadvantages

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 advantages to direct index investing for large institutions.

ETFs Risks

Market Risk Trading Risk Tracking error risk

Foreign Exchange Risk

What are Gold ETFs ?


Gold ETFs are open-ended mutual fund

schemes 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.

Working of a Reliance Gold ETF During NFO


Minimum investment amount of Rs 5000/& in

Investors
multiples of Re 1/- thereafter. Reliance MF buys gold & deposits it with the custodian. Custodian

Reliance Mutual Fund

Fund DematA/c of Investors Custodian

The units allotted will be credited to the depositary account of the investors.

Working of a Reliance Gold ETF On going

Secondary market

Seller
Authorized Participants
Creation in cash/gold Market making / Arbitrage cash

Buy/Sell Redemption in cash/ gold

Stock Exchange cash Buyer

1 Authorized participants & large investors can directly deal

Reliance Mutual Fund

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

Investor Requirements for trading in Gold ETF


Trading account with a stock exchange broker.
Demat account as Gold ETF can be traded only

in demat form.

Basic terms involved into Gold ETF


NAV :- Stands for the Net Asset Value

declared everyday by Asset Management Company which manages the ETF .It is calculated by dividing the total value of portfolio less any liabilities, by the number of fund ETFs outstanding. BID :- The Price at which the investors want to buy Gold ETF. ASK :- The Price at which the investors want to sell Gold ETF.

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.

Comparison of Gold ETF with Physical Gold


Sr no
1

Jeweller Parameter
How Gold is held ? Storage Requirement Quantity to Buy / Sell

Bank

Gold ETF
Dematerialized (Electronic Form) Demat Account Minimum is or 1 gram according to the fund

Physical (Bars / Physical (Bars Coins) / Coins) Locker / Safe Available in standard denomination Locker / Safe Available in standard denomination

2 3

4
5

Wealth Tax
Long Term Capital Gains Tax

Yes
Only after 3 years

Yes
Only after 3 years

No
After 1 year

Gold ETF Companies in India


Sr no Name NSE Ticker Turnover in Lacs as on Aug 12 2011
37.11 341.83 397.37 15.24 288.75 440.82 9.9

Expense Ratio 1.25%

1 2 3

Quantum UTI SBI Axis HDFC Relianace Religare

QGOLDHALF GOLDSHARE SBIGETS AXISGOLD HDFCMFGETF RELGOLD RELIGAREGO

4 5
6 7 8 9 10 11

1.00% 1.00% 1.00% 1.00%

Benchmark ICICI Prudential


Kotak Birla Sunlife

GOLDBEES IPGETF
KOTAKGOLD BSLGOLDETF

5,490.42 14.17
1,042.38 1.64

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 assured returns. ETFs are a new concept in India compared to other parts of the world.

Thank You