EXCHANGE

TRADED FUNDS
YUVRAJ PATIL
 MUTUAL FUND STOCK
– Simplicity + Stock:
– Transparency – On Exchange

– Risk control – Trading flexibility

– Diversification – Trading strategies

– Open-End Fund

Exchange Traded Fund (ETF)

EXCHANGE TRADED FUND

ETFs are mutual funds that trade like a stock

NATIONAL STOCK EXCHANGE 2

ETF SETTLEMENT CYCLE

S. No. Day Time Activity

1. T - Trading day

2. T+1 1300 Custodial Confirmation

3. T+1 1430 Final Obligation download

4. T+2 1100 Securities and Funds pay-in

5. T+2 1330 Securities and Funds pay-out
6. T+2 - Auctions for shortages

7. T+3 - Securities Auction & Funds pay-in/pay-out

NATIONAL STOCK EXCHANGE 3

ETF – A WORLD SCENARIO
A BRIEF HISTORY OF ETFs
 ETFs were launched post the 1987 crash to overcome the lack of liquidity and intense
program trading in the market
 The first ETF traded on a U.S. exchange was StateStreet’s SPDR (SPY), which was
introduced in 1993. SPY tracks the S&P 500 Index and is currently the most heavily-
traded security in the world.
 Due to popularity of indexing in the 1990s, ETFs soon became popular amongst
individual investors and financial advisors as a transparent and liquid method of
indexing which was also better than index mutual funds
 As the availability of ETFs grew for different asset classes, investment styles and
geographic sectors, it made possible for investors to construct a well diversified
portfolio at a very low cost

NATIONAL STOCK EXCHANGE 5

 GLOBAL ETF MARKET
4,542
$1,800 5000
$1,677
$1,600 ETF Assets # Total ETFs 4500

$1,400 4000
3500
Assets (USD Bn)

$1,200
3000
$1,000
2500
$800
2000
$600
1500
$400 1000
3
$200 $0.80 500
$0 0

Source: http://www.blackrockinternational.com (Nov-12)

NATIONAL STOCK EXCHANGE 6

 ASIAN ETF MARKET
$120 491 600
$111
ETF Assets # Total ETFs
$100 500

$80 400
USD Billion

$60 300

$40 200
12
$20 $10 100

$0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: http://www.blackrockinternational.com

NATIONAL STOCK EXCHANGE 7

 KEY BENEFITS OF ETF

Easy to
Broad
Cost Implement
Market
Advantage any Inv.
Access
Strategy

Diversified Exposure Buy And Hold

To Market Hedging Investing

Core/Satellite Alternative To
Active Trading
Investing Futures*

• The challenging market conditions in 2008-09 caused a significant shift in investors’ risk
appetite and in their desire for liquidity. ETFs met their need for greater transparency
regarding cost, holdings, price, liquidity, product structure, and risk and return.
* For ETFs in US markets where the underlying is futures

NATIONAL STOCK EXCHANGE 8

FACTORS DRIVING ETF GROWTH

1 Large variety of indices of Equity, Fixed income, Commodity and other covered by ETFs

2 Facilitation of investor education & trading by large broking houses

Special market campaigns by many on-line brokers in an effort to win new accounts and
3
cross-sell other products

4 Major fund platforms embracing ETFs

Regulatory changes in the US, Europe and many emerging markets that allow funds to
5
make larger allocations to ETFs

Development and growth of investment styles that employ products like ETFs that
6
deliver low cost beta

NATIONAL STOCK EXCHANGE 9

ETF – THE INDIAN STORY
 INDIAN ETF MARKET
14000 35

12000 30
AUM Gold ETF AUM Other ETF #ETF
10000 25
AUM (INR Crore)

Number of ETFs
8000 20

6000 15

4000 10

2000 5

0 0
Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-12

* Average Quarterly AUM Source www.amfiindia.com

NATIONAL STOCK EXCHANGE 11

ETFs IN INDIA
• Gold ETF
• Liquid ETF
• Index ETF
– Nifty
– Junior Nifty
– Bank Nifty
– PSU Banks
– Shariah
• International Index ETF
– Hang Seng
– S&P CNX 500

NATIONAL STOCK EXCHANGE 12

ETFs: BENEFITS FOR THE RETAIL INVESTOR

1 Very Simple to Trade: Can be traded on NSE like any stock

Quick Diversification: Opens up multiple asset classes are affordable

2 costs

3 Economical: Lowest expense ratio amongst all equity mutual funds

4 Only brokerage payable in buying or selling on exchange

5 You can track your investment value in real time

NATIONAL STOCK EXCHANGE 13

TYPICAL INVESTMENT PATTERN
• This is a typical salaried individual’s Fixed Income Equity
investment pattern Investment Investment

• As we can see it is heavily tilted towards

fixed income products, including his
retirement savings
• This lopsided investment pattern exposes
the individual to the risk of inflation and
inefficient utilization of his assets
• There is a strong need to rebalance the
portfolio to improve the returns and
counter the risk of inflation

NATIONAL STOCK EXCHANGE 14

CORRECTING THE INVESTMENT TILT
• The best way to correct this is
– To participate in the economic growth by a broad SAFE SIMPLE SECURE
exposure to the Indian markets
– To include gold in portfolio to hedge against the
inflationary pressures
– To insure against distress situations by investing in gold NIFTY
• The Nifty 50 offers you an avenue to participate in ETF
the growth of Indian economy and benefit from the
same
• Nifty ETF is a simple and economical way to invest
in the Nifty GOLD
ETF
• Gold investment is at its simplest with Gold ETFs
• They allow investors to accumulate pure gold as
and when they are ready for it.

NATIONAL STOCK EXCHANGE 15

NIFTY ETF
NIFTY ETF S&P CNX Nifty Index
7000
Why NIFTY? Dec-
12, 5870.95
6000
– Blue chip stocks
5000
– Well diversified
4000
– Highly liquid
3000
– Represents Indian business economy
Jan-
2000
94, 1083.74

Why NIFTY ETF? 1000

0
– Direct investment in benchmark index
– Lower Cost
– More Transparency
– More Flexibility Nifty ETF is the simple and safe way to
– Small ticket size access equity markets

NATIONAL STOCK EXCHANGE

17
NIFTY ETF: A COMPARISON
NIFTY
STOCKS NIFTY MUTUAL FUND
ETF

EXPOSURE Narrow Broad Broad

VOLATILITY High Low Low

EXPENSE Low High Low

CAPITAL REQ
High Low Low

PRICE Market Rates NAV at EOD Market Rates

ARBITRAGE Yes No Yes

MARKET No May Be Yes

RETURNS
INTRADAY Yes No Yes
TRADING

NATIONAL STOCK EXCHANGE

18
NIFTY ETF: KEY BENEFITS

1 Simple: Can be traded on NSE like a stock

2 Instant Diversification: Single scrip to trade in a broad Indian market

3 Economical: Lowest expense ratio amongst all equity mutual funds

4 Auto Balancing: No need to rebalance portfolio after corporate actions

No costs other than brokerage are payable in buying or selling on

5 exchange

6 You can track your investment value in real time

NATIONAL STOCK EXCHANGE 19

NIFTY ETF – SPECIFICATIONS
Type of fund Equity ETF
Investment In basket of securities replicating the S&P CNX NIFTY index
Taxation treatment Equity
Pricing per Unit ~ 1/10th of Index
Tick Size INR 0.01
Minimum Lot (on Exchange) 1 unit
Minimum Lot (Direct) 10000 units
Expense Ratio ~ 0.50 %
Trading hours Same as cash market
Price Market determined, tracks NAV
Trade cycle T+2
Securities covered by S&P CNX Nifty Index Upto 100%
Allocation Pattern Money market, securitized debts, bonds and
0 – 10%
cash at call

NATIONAL STOCK EXCHANGE 20

GOLD ETF
NATIONAL STOCK EXCHANGE 22
 18
‘000

16
Price of Basket of Goods

14
12
10
8 Correlation = 94%
6
4
2
Price of 10 Grams of Gold
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

• If we look at the inflation data, represented here by the price of a fixed basket of
goods, against the gold prices, we will see that these have a very high correlation
• Which means that any rise in the inflation will be reflected in the rise in gold price

Source: Inflation data (Historic Inflation Rates for India http://www.inflation.eu) & Gold Price (Annual Average Prices in INR www.gold.org)

NATIONAL STOCK EXCHANGE 23

 WHY INVEST IN GOLD

200
Equity Returns Gold Returns
150
Great Arab Oil Sub Prime
Asian Crisis
Depression Embargo Crisis
100
Percent Returns

50

-50

-100 Japanese
World War 2 Dotcom Bust
Stock Bubble
-150
1929 1939 1973 1989 1997 2000 2007

NATIONAL STOCK EXCHANGE 24

 WHY INVEST IN GOLD

80% 50%
ECONOMICALLY SECURE ASSET
39% 2000
An asset which is no one’s liability 70% 40%
2012
Hence 60%
31%
30%
 No risk of inflation 26%

21%
 No risk of repudiation 50%
20%
40%
INCONTROVERTIBLE LIQUIDITY
10%
Unaffected by exchange controls or asset 30%
freezes 0%
20% 2%
2%
HIGH PUBLIC OCNFIDENCE 10% -15%
-10%
0% -2%
Most central banks have increased gold
0% -20%
as a percentage of total reserves in the
previous decade

Gold as a Percentage of National Reserves

NATIONAL STOCK EXCHANGE 25

NATIONAL STOCK EXCHANGE 26
GOLD ETF
Unit of Dematerialized Gold
Gold ETF

SIMPLE
Lists and trades on a stock exchange

Every ETF unit is backed by physical gold

Efficient
What makes it attractive?

No wastage, impurities & extra charges SAFE

Transparent
Transparent real time prices

Convenient
Can be purchased in small lots, typically 1 gram TRUSTED

Tax Efficient
Tax efficient way to hold gold

NATIONAL STOCK EXCHANGE 27

GOLD ETF: KEY BENEFITS

1 Your ETFs are backed by high quality physical gold

2 Your gold is safely stored in highly secure vaults

3 Lots of 1000 gm equivalents can be converted into physical gold

4 You can sell yours ETFs on the exchange like a share

No costs other than brokerage are payable in buying or selling on

5 exchange
No wealth tax unlike physical purchase, also LTCG benefit available after
6 one year

7 You can track your investment value in real time

NATIONAL STOCK EXCHANGE 28

GOLD ETF – SPECIFICATIONS
Type of fund Non Equity ETF
Investment In underlying physical gold
Taxation treatment Debt
Unit ~1 gm of gold, typically
Tick Size INR 0.01
Minimum Lot (on Exchange) 1 unit
Minimum Lot (Direct) 1000 units
Expense Ratio ~ 1.00 %
Trade hours Same as cash market
Price Market determined, tracks NAV
Trade cycle T+2
Gold 90 – 100%
Allocation Pattern Money market, securitized debts, bonds and
0 – 10%
cash at call

NATIONAL STOCK EXCHANGE 29

GOLD ETF: CREATION UNIT & NAV
UNIT CREATION
Units in 1 Creation Unit 1000
One creation unit
NAV per unit INR 2025
=
1 kg of Physical Gold Value of one creation unit INR 2,025,000
+
Value of 1 kg Gold INR 2,050,000
Cash Component
Cash Component1 INR - 25,000

NAV COMPUTATION

Market Value or Fair Value of Net Current Assets (including

Schemes Investments2 + accrued expenses)
NAV (INR) =
Number of Units Outstanding as on
Valuation Date

1 CashComponent will vary depending upon the actual charges incurred like Custodial Charges and other
incidental charges for creating units
2 Valuation of investments will be done as specified by the issuer in the Scheme Document

NATIONAL STOCK EXCHANGE 30

LISTED GOLD ETFs
AUM
Name Inception Unit Size (gm)
(INR Crores)
Goldman Sachs Gold ETF Feb-07 3,023 1
Reliance Gold ETF Nov-07 2,899 1
Kotak Gold ETF Jul-07 1,135 1
SBI Gold ETS Apr-09 988 1
UTI Gold ETF Mar-07 701 1
HDFC Gold ETF Jul-10 687 1
Axis Gold ETF Nov-10 292 1
ICICI Prudential Gold ETF Jul-10 182 1
IDBI Gold ETF May-11 119 1
Birla Sun Life Gold ETF Nov-11 116 1
Religare Gold ETF Feb-10 71 0.5
Quantum Gold Feb-08 48 1
Canara Robeco Gold ETF Mar-12 47 1
Motilal Oswal MOSt Shares Gold ETF Mar-12 27 1
TOTAL 10037
* The AUM as on Sep 2012 (Source: www.valueresearchonline.com)

NATIONAL STOCK EXCHANGE 31

THANK YOU
ANNEXURES
Annexure 1: The Unit Creation of an ETF

CREATION UNIT UNIT CREATION PROCESS

A fixed number of units of the  The requisite Securities or gold

Creation scheme, which is exchanged for a basket of
constituting the Portfolio Deposit of
shares underlying the index(or gold) and
Unit cash the scheme have to be transferred
to the Fund’s DP account (or vault)
= while the Cash Component has to
be paid to the Custodian/AMC
A pre-defined basket of Securities that
Portfolio represent the underlying index or gold as
Deposit announced by the Fund on daily basis
 On confirmation of the same by the
Custodian/AMC, the AMC will
+ transfer the units of the Scheme
The Cash Component represents the into the investor’s DP account
Cash difference between the Applicable NAV of
a Creation Unit and the market value of the
Component Portfolio deposit.

1 Cash Component will represent accrued Dividends, accrued annual charges including management fees and residual cash in the Scheme. It
will also include transaction cost as charged by the Custodian/ Depositary Participant, equalization of Dividend and other incidental expenses
for Creating Units. It will also include Entry Load, as may be levied by the Fund from time to time and statutory levies, if any.

NATIONAL STOCK EXCHANGE 34

Structure of an ETF

PRIMARY MARKET SECONDARY MARKET

Buyer

ETF Units
Cash
Arbitrage
Authorized Participants Buy & Sell
Exchange
& Large Investors Market Making

ETF Units
Cash
Creation Redemption

ETF Issuer Seller

* Creation & Redemption of ETF units is done only in integral multiples of creation units.

NATIONAL STOCK EXCHANGE 35

The NAV of an ETF

NAV COMPUTATION

Market Value or Fair Value of Net Current Assets (including

Schemes Investments
+ accrued expenses)
NAV (INR) =
Number of Units Outstanding as on
Valuation Date

 Note for Valuation for Gold:

The gold held by the Scheme shall be valued at the AM fixing price of London Bullion Market
Association (LBMA) in US dollars per troy ounce for gold having a fineness of 995.0 parts per
thousand, subject to the following
 adjustment for conversion to metric measures as per standard conversion rates
 adjustment for conversion of US dollars into Indian rupees as per the RBI reference rate

NATIONAL STOCK EXCHANGE 36