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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