EXCHANGE TRADED FUNDS

INTRODUCTION & EVOLUTION

Introduction
Save Invest Formation of Corpus fund for various objectives Different Avenues : PPF, Mutual funds, Stocks, Post Office schemes, Gold, Insurance, Real estate, ETF etc`. Most Sought after Avenues: EPF, PPF, MF, Insurance

Evolution
1989 - Toronto Index Participation Fund (TIP 35), Canada 1993 S&P 500 Depository Receipts (SPDR), US 1999 Hong Kong Tracker Fund , 1st in Asia 2001 Euro STOXX 50, Europe

What are Exchange traded Funds (ETFs)

Exchange Traded Funds mix of a stock and a MF
Like a MF set of specified stocks index or commodity Like equity share traded on Stock Exchanges on a real time 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 Rs 1500 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 of Goldman Bees, which is a Gold ETF. This way you can invest in ETF in India

SIZE OF GLOBAL ETF MARKETS

Total assets in excess of $1 trillion 2,252+ ETFs listed in 42 different exchanges worldwide 957 new ETFs entered the market in 2010 itself Popular amongst institutional and retails segments

SIZE OF INDIAN ETF MARKET

Total of 31 ETFs Total ETF assets of Rs 8513 crores Just one percent of total mutual fund assets Corpus & net flow Rs. 11,821 Cr., May 2012 Volumes:
Equity Rs. 666 Cr., July 2012 vs. Rs. 1,189 Cr., June 2012 Gold ETF Rs. 354 Cr., other ETFs Rs. 312 Cr.

TREND IN ETF CORPUS

Category June 12 Broader Indices ETFs Sector Indices ETFs Gold ETFs Liquid ETFs 1,086 March 12 1,041 Corpus (Rs. Crores) as on Dec. 11 986 June 11 1,397 June 10 697 June 09 361

93

95

86

185

68

204

10,086 424

9,886 470

9,153 443

5,568 475

1,939 370

844 333

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)

OPERATIONAL ASPECT

CREATION OF AN ETF
Hold Shares
Creation basket and/or cash

Fund or Trust
One creation unit (e.g. 50,000 shares of an ETF)

Authorised Participant

Investors

Trade on an exchange

PROCESS FOR CREATION OF ETF UNITS

Files application with regulator

Authorised Participant
Borrows shares from institutional investors

Places shares with Custodian/ Trust to form Creation Units

Trust
Issues shares of ETF

Issues shares to Public for onward transactions

Sponsor

Authorised Participants

Authorised Participant

REDEMPTION OF AN ETF

Gets ETF shares equivalent of Creation Units

Authorised Participant
Surrenders the ETF shares to Trust/ Custodian

Exchanges the ETF shares for Creation Unit securities

Trust
In-kind exchange Less fees & costs

Authorised Participant

Trust

TYPES OF ETFS
Equity Gold World Indices Debt

SCHEMES OF ETFS LISTED ON NSE

Equity:
1. 2. 3. 4. 5. Goldman Sachs Nifty Exchange Traded Scheme Goldman Sachs Nifty Junior Exchange Traded Scheme Goldman Sachs Banking Index Exchange Traded Scheme Goldman Sachs PSU Bank Exchange Traded Scheme Goldman Sachs S&P CNX Nifty Shariah Index Exchange Traded Scheme S&P CNX Nifty UTI Notional Depository Reciepts Scheme (SUNDER) Kotak PSU Bank ETF Reliance Banking Exchange Traded Fund Quantum Index Fund Kotak Nifty ETF MOSt Shares M50 Goldman Sachs Infrastructure Exchange Traded Scheme MOSt Shares M100 Birla Sun Life Nifty ETF

6. 7. 8. 9. 10. 11. 12. 13. 14.

SCHEMES OF ETFS LISTED ON NSE

Gold:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Goldman Sachs Gold Exchange Traded Scheme Axis Gold ETF UTI GOLD Exchange Traded Fund HDFC Gold Exchange Traded Fund ICICI Prudential Gold Exchange Traded Fund Kotak Gold Exchange Traded Fund Quantum Gold Fund (an ETF) Reliance Gold Exchange Traded Fund Religare Gold Exchange Traded Fund SBI Gold Exchange Traded Scheme Birla Sun Life Gold ETF IDBI Gold Exchange Traded Fund Motilal Oswal MOSt Shares Gold ETF Canara Robeco Gold Exchange Traded Fund

SCHEMES OF ETFS LISTED ON NSE

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

MERITS
Enjoy flexibility of a stock and diversification of an index fund Transaction at real time prices through terminals across the country 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 conventional funds Lower expense ratios than mutual funds Delivery in demat account Provides arbitrage opportunities between Futures and Cash Markets

DEMERITS
Underlying volatility Transaction cost Liquidity Capital gains distribution SIP Investing Dividend reinvestment

ETFS VS STOCKS VS MFS

Parameters
Fund Size NAV Liquidity Uses

ETFs
Flexible Real Time Stock Market Hedging, Arbitrage and Investment Exchange Daily /Real Time

Stocks
Flexible Real Time Stock Market Hedging, Arbitrage and Investment Exchange Real Time Daily

MFs
Fixed/ Flexible Fund/ Stock Market Investment

Availability Portfolio Disclosure

AMC Monthly

Intra day

Possible at low cost

Possible at low cost

NA

ETFS VS STOCKS VS MFS

Parameters
Limit Orders Diversification with a single unit Returns at par with the market/ index Documentation Exit load

ETFs
Flexible Possible Achievable

Stocks
Flexible Impossible Not Achievable

MFs
Not Applicable Possible Not Achievable

Paperless NIL

Paperless NIL

Agreement Charged

COMPARISON ETFS VS. PHYSICAL GOLD.

Parameters
Purchase & Sale mode Security of Assets Transparency Impurity Risk Pricing(for retail investors) Selling back Bid Ask Spread

GETF
Demat Form Taken care by funds Very High Nil Transparent will be traded at NSE Sell back on exchange Very low

Jewelers
Bar/Coin/Jewell ery Investors Concern Very Low High

Banks
Bar/Coin Investors Concern High Nil

Neither standard Not standard. nor transparent Huge Conditional and unconditional Very high Markup,10-15% ideally restricted Cant see back

COMPARISON ETFS VS. PHYSICAL GOLD.

Parameters
Denomination

GETF
1 gram and in multiples of 1 gram No Applicable after 1 year

Jewelers
Available in standard denominations Yes Applicable after 3 years

Banks
Available in standard denominations No Applicable after 3 Years

Wealth Tax Long term Capital Gains tax

GOLD ETFS

PERFORMANCE OF GOLD ETFS

BANK ETFS

GOLDMAN SACHS NIFTY ETF

CURRENT SCENARIO AS OF 5TH AUG 12

The finance ministry is expected to take a final decision by this month-end on exchange traded fund (ETF) for selling shares of state-owned firms as part of steps to meet the disinvestment target of Rs. 30,000 crore this fiscal. ETF in-principle has been talked about, a top finance ministry official told PTI. There has been firming up certain views on this. It is expected to be finalised during the month.

RISKS INVOLVED
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

CHALLENGES
Since ETFs not sold through distributors spreading awareness among investors for this class of asset Indian stock market indices see frequent churn of indices going in and out which forces the fund manager to sell the scrip that moves out of the index and buy the scrip that enters the index The ETF fund manager himself rebalances the portfolio; the scheme bears the cost ETF can be as volatile as a normal security listed on the Exchange

CHALLENGES
Since ETFs not sold through distributors spreading awareness among investors for this class of asset Indian stock market indices see frequent churn of indices going in and out which forces the fund manager to sell the scrip that moves out of the index and buy the scrip that enters the index The ETF fund manager himself rebalances the portfolio; the scheme bears the cost ETF can be as volatile as a normal security listed on the Exchange

CONCLUSION
There are many uses for ETFs ETFs allow an investor to implement a variety of strategies and are especially popular for gaining emerging 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, ETFs should be considered. In time, as we have seen with the robust offerings for developed market exposure, the same level of choice is now being available for emerging markets.