Corporate Finance Presentation on ETF

Presented by Group A3

Arun Thottan-18039
Arshana Memon-18038
Archana Bhargavan-18035
CS Thomas- 18048
Ashwin R Pujari-18041
Exchange Traded Funds (ETFs)
● They came into existence in USA in 1993

● Basket of securities that are traded like individual stock on an exchange.

● ETFs charge lower annual expenses than index mutual funds.

● About 60% of trading volumes on the American stock exchange are from ETFs.

● Most popular ETFs are QQQ(cubes) based on the Nasdaq-100 index, SPDRs
(spiders) based on the S&P index.

● The average trading volume in QQQ is around 89 million shares.

Arshana Iqbal Memon -18038

Advantages of ETFs
● ETFs offer the convenience of intra-day purchase and sale on the Exchange to take
advantage of the prevailing price.

● ETFs protect long-term investors from inflows and outflows of short-term investors.

● ETFs are highly flexible and can be used as tool for gaining instant exposure are to
equity markets, equitsing cash or for arbitrating between the cash and future markets.

● Subscription/redemption of units work on the concept of exchange with underlying

securities instead of cash.

Arshana Iqbal Memon-18038

 Growth Trends in ETF Market

➢ In 2018, the global ETF market was

valued at $5.4 trillion.
➢ The US and Europe comprise 70% and
16% of this.
➢ Top three ETF issuers are iShares,
Vanguard and State Street.
➢ India is second fastest growing market
with assets doubling from $1.9billion in
2014 to $4billion in 2017.
➢ Vikram Limaye expects it to cross
$14billion by 2020.

Ashwin R Pujari-18041
Arbitrage Opportunities in ETF
➢ ETFs trade in real time, funds provide
an indicative NAV, or iNAV, which
may be different from market price.
➢ When there is more demand than the
units on sale, the market price may be
25-50 basis points more than the iNAV
➢ So an investor sells on an exchange
after buying from an AMC to gain
from arbitrage.
➢ Arbitrage viable only when difference
is 50-75 basis points, to cover STT,
ER.

Ashwin R Pujari-18041
Government and ETF’s
➢ Bharat 22 ETF was launched in November
2017, to divest stake in 22 companies.
➢ Managed by ICICI Prudential, it has lowest
expense ratio of 0.01%.
➢ Successfully launched with oversubscription
over 4 fold at 31000 crores with issue size at
8000 crores.
➢ Investors were sceptical of it as it operated
under a fixed index created separately.
➢ Also the 3 private cos constitute 40% of ETF,
leading to great risk exposure.
➢ The ETF has lost 8.5% since launch with
AUM down to 5100 crores
Ashwin R Pujari-18041
Popular types of ETF
● Equity Funds- Most ETFs track equity indexes or sectors. Some index ETFs mimic
an index in its entirety, and others use representative sampling, which deviates
slightly by using futures, option and swap contracts, and the purchase of stocks
sometimes not found in the index.
● Fixed-Income Funds- Most financial professionals recommend that you invest a
portion of your portfolio in fixed-income securities such as bonds and bond ETFs.
This is because bonds tend to reduce a portfolio's volatility, while also providing an
additional stream of income.

Archana C Bhargavan (18035)

● Commodity Funds- Investors can buy a commodity ETF that tracks the price changes
of particular commodities like gold or oil, or in a commodity stock ETF that invests
in the common shares of commodity producers.
● Currency Funds- Currency investing should represent a small portion of your overall
investment strategy and is meant to soften the blow of currency volatility.
● Real Estate Funds- They must pay out 90% of their taxable income to shareholders.
This makes them extremely attractive in terms of yield, despite the increased
volatility compared to bonds.

Archana C Bhargavan (18035)

Continued...
● Specialty Funds- Two of the more interesting are inverse funds, which profit when a
particular index does poorly, and leveraged funds, which can double or triple the
returns of a particular index by using leverage, as the name implies.

Archana C Bhargavan (18035)

ETF Vs Mutual Fund

● ETFs offer more trading flexibility:

● ETFs provide more transparency

● ETFs often require lower minimum investments:

● Mutual funds allow you to trade without paying commission:

C S Thomas (18048)
C S Thomas (18048)
ETF Creation and Redemption
● Supply of ETF shares is regulated through a mechanism known as
creation and redemption

● Involves large specialized investors, called authorized participants

(APs)

● AP can redeem ETF shares by selling them back to the fund’s

sponsor.

● On the other hand, selling assets (stocks, bonds, etc.) to the ETF
sponsor, in return for shares in the ETF, is called creation.
ETF Creation when Shares Trade at a Premium
Imagine share price of $101 , If the value of the stocks that the ETF owns was
only worth $100 on a per share basis then the fund is trading at a premium to its
Net Asset Value (NAV).

The AP will buy the shares that the ETF wants to hold in its portfolio from the
market and sells them to the fund in return for shares of the ETF. AP buying stock
worth $100 per share but getting shares of the ETF worth $101 per share. This
process is called creation-

ETF Redemption when Shares Trade at a Discount

Imagine an ETF that holds the stocks worth $99 per share. If the value of the
stocks the ETF is holding in the fund are worth $100 per share then the ETF is
trading at a discount to NAV.

To bring the ETF’s share price back to its NAV, an AP will buy shares of the ETF
on the open market and sell them back to the ETF in return for shares of the
underlying stock portfolio
References
➢ https://economictimes.indiatimes.com/wealth/invest/are-exchange-traded-funds-good
-for-you-find-out/articleshow/60032968.cms-
August 14, 2017.
➢ https://www.businesstoday.in/moneytoday/investment/all-about-investing-in-exchang
e-traded-funds/story/187511.html
➢ https://economictimes.indiatimes.com/mf/analysis/its-time-investors-actively-partici
pate-in-etfs/articleshow/65287626.cms
- August 6, 2018
➢ https://www.investopedia.com/investing/popular-etf-types-for-your-portfolio/