EXCHANGE TRADED FUNDS
&
FUNDS OF FUND
Presented By
Priti Premkumar (M0936)
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WHAT ARE ETF’s?
A security that tracks an index, a commodity, or a basket of assets like an index
fund, but, trades like a stock on an exchange, thus experiencing price changes
throughout the day as it is bought and sold, at the same time, combining the benefits
of a mutual fund.
ETFs represent shares of ownership of a unit investment trust
(UIT), which holds portfolios of stocks, bonds, currencies or
commodities.
ETFs are security certificates that state the legal right of ownership
over a portion of a basket of individual stock certificates
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ETFs are essentially mutual fund schemes or index funds that are
listed and traded on the exchange like stocks.
ETFs are open to price fluctuations during the entire trading
period.
Since ETFs are traded on the stock market through brokers,
minimal interaction with fund houses is required.
Fees associated with ETFs are also lower that the mutual fund
fees.
Additionally, ETFs afford greater tax efficiency than mutual
funds. While these benefits do exist, the one driving the
popularity of ETFs is liquidity.
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HISTORY OF ETF’s.
They owe their origin to a product called Index
Participation Shares that was traded on the American
Stock Exchange and the Philadelphia Stock Exchange in
1989 as an S&P 500 proxy.
In the US, Standard & Poor's Depositary Receipts
(SPDRs), or "Spiders," were the first ETF to hit the market.
ETFs are very popular abroad with nearly 60% of trading
volumes on the American Stock Exchange (AMEX)
captured by ETFs.
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• At the end of March 2008, there were over 1280 ETFs with
assets of US$ 760.80 billion managed by 79 managers across 42
exchanges around the World. Among the popular ones are: -
1. SPDRs - SPDRs track the S&P 500. These are traded on the
AMEX
2. QQQs - Popularly known as Cubes, they are listed on the
NASDAQ and track the NASDAQ -100.
3. iShares - World Equity Benchmark Shares are listed on the
AMEX and offer investors access to 17 foreign markets.
4. TRAHK - Trahks is listed on the Stock of Exchange of Hong
Kong and the investment objective is to provide investment
results that closely correspond to the performance of the Hang
Seng Index.
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TYPES OF ETF’s IN INDIA.
Index ETFs
Index funds listed and traded on exchanges like stocks. Can be
compared to a mutual fund that you can buy and sell in real time,
at a price that changes throughout the day, based on the price
movement of its underlying portfolio, or basket of securities.
Commodity ETFs
Commodity ETFs attempt to track the price of a single
commodity, such as gold or oil, or a basket of commodities by
holding the actual commodity in storage, or by purchasing futures
contracts.
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CLASSES OF ETF’s.
Index Funds (Nifty, Junior Nifty, etc.)
Bank Funds (Bank BeES, PSUBNKBEES,
KOTAKPSUBK, etc. )
Gold ETF (GoldBEES, KOTAKGold, Gold Share, Rel
Gold etc.)
Liquid Funds (Liquid BeES, HDFC LF, Reliance LF etc.)
Oil ETF (Oil Service HOLDRS T, United States Oil, etc)
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CREATION PROCESS
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BENEFITS OF ETF’s
Diversification - Eliminates risk of concentrated investments in individual
stocks.
Global Exposure - Some ETFs invest in a pool of overseas securities,
offering investors exposure to a foreign market
Trades like a share
Reduces logistics of filling in purchase and redemption slips
Low transaction cost
Ensures Equitable Structure - Long term investors will not be affected by
other investor’s movement in and out of the fund.
Information Dissemination – Being exchange-listed instruments, ETFs
need to comply with the information disclosure requirements of the
relevant stock exchanges.
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ETF V/S STOCK & MUTUAL FUNDS
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FUNDS OF FUND
A "Fund Of Funds" (FOF) is an investment strategy
of holding a portfolio of other investment funds
rather than investing directly in shares, bonds or
other securities. This type of investing is often
referred to as multi-manager investment.
eg: A mutual fund that invests in other mutual
funds.
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• PREFERRED RETURN
– most funds of funds provide preferred returns.
– generally a fixed percentage annual rate of return
– general range - from 6% to 12%
• MANAGEMENT FEES
– Usually an amount equal to a fixed percentage of capital
commitments
– Management fees are typically paid by a fund of funds
quarterly in advance
– ranges - .75 to 1.5% of capital commitments
– Often management fee rates decline when the fund is
fully invested.
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• TRANSACTION FEES
– Unlikely
• INVESTOR
– profile high net worth individuals and small
institutional investors paragraph
• TRANSFER REDEMPTION
– Redemptions and withdrawals are rarely
allowed
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TYPES OF FOF
Mutual Funds FOF
A Mutual fund FOF invests in other mutual funds. Just as a mutual
fund invests in a number of different securities, a fund of funds
holds shares of many different mutual funds.
Hedge fund FOF
A Hedge fund FOF invests in a portfolio of different hedge funds to
provide broad exposure to the hedge fund industry and to diversify
the risks associated with a single investment fund.
Venture capital FOF.
A fund of venture capital funds is a fund of funds that invests in a
portfolio of different venture capital funds to access to private
capital markets. Clients are usually university endowments and
pension funds
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WHY INVEST IN FOF
Diversification
Tax Efficiency
Actively Managed
Simplicity
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CONS OF FOF
• Expense fees on fund of funds are higher than those on regular funds
because they include part of the expense fees charged by the underlying
funds.
• FOF buys many different funds which themselves invest in many different
stocks, it is possible for the fund of funds to own the same stock through
several different funds and it can be difficult to keep track of the overall
holdings.
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SOURCES
Portfolio Organizer Journal
The Icfai University Press
www.investopedia.com
www.telegraphinvestdirect.co.uk.
www.en.wikipedia.org
www.moneycontrol.com
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