exchange traded funds

1. Exchange Traded Funds
Aditya Chouraria,
Finance Varsity.

2. Exchange Traded Funds

3. Exchange Traded Funds
 An Exchange traded fund is a combination of
open and closed ended fund.
HISTORY
o The very first ETF was issued in 1993 in USA
by State street global advisors with the launch
of the S&P 500 depository receipts, also known
as SPDRs(spiders).
o The very first ETF, in India, was launched by
Benchmark Mutual Fund in the year 2002
named Nifty BeES which was based on S&P
CNX nifty index. 5

4. Exchange Traded Funds
 ETF’s are a basket of securities which are
traded on a stock exchange.
 The investment objective is to mimic the
similar return as that of a particular market
index.
 ETF originates through a New Fund
offering(NFO) by an AMC.
 Investors exchange their portfolio and cash
component in return for ETF units.
 NFO are limited to large Institution
investors and other large investors.

5. Exchange Traded Funds
 ETF units are made up of two components- portfolio
deposit and cash component.
 The NAV of an ETF is the value of all the
components of the benchmark index, held by the
ETF, plus all accrued dividends less management
fees.
NAV= Fair or market value of schemes + Net Current
assets / No. of units outstanding as on valuation
date
 ETF can neither be held as an Investment or sold in
the secondary market.
 Investors can also redeem the ETF units in
exchange for the underlying security but not cash.

6. Exchange Traded Funds-
How does an ETF work

7. Exchange Traded Funds
Advantages –
 Buy and sells just like a share.
 Minimum trading lot , just one unit.
 Provides diversification.
 Lower management cost than index funds,
since they are listed in exchange, hence
their sale and redemption are much lower.
 Traded throughout the day in stock
exchange, hence better than open ended
Mutual funds which are traded only at days
closing NAV and the AMC’s.

8. Exchange Traded Funds
Advantages-
 ETFs are better than close ended mutual
funds whose NAV’s may not reflect actual
underlying assets, whereas ETF NAV reflect
actual because of arbitrage possibilities.
 lower tracking error as compared to index
funds because of arbitrage opportunities.
 Comparative ease in taking long and
positions in ETF than index funds.

9. Exchange Traded Funds
How does ETF represent actual NAV?
 NAV is at premium to underlying asset-
- AMC can create additional ETF units by
depositing lower priced securities.
 NAV is at discount to underlying asset-
- AMC can redeem ETF units for higher
valued underlying securities and sell in
secondary market.

10. ETF’s v/s stocks and mutual funds
FUNCTIONALITY ETFs Stocks MF units
Real time trading and practicing
through out market house.
Yes Yes No
Ability to put limit orders Yes Yes No
Can be traded real time on NSE Yes Yes No
Is arbitrage possible between future
and cash market
Yes Yes No
Is diversification possible with a
single unit.
Yes No Yes
Returns at par with the market/
index.
Yes No No
Intra day trading Yes Yes No
Paper less investing Yes Yes No
Exit load. No No Yes

11. Exchange Traded Funds
Types Of ETFs-
• Index Funds(NSE, BSE ,etc)
- This is an Index ETF that tracks Index like
NIFTY, CNX bank nifty which means that they
hold the stocks in the same proposition as they
are present in the Nifty index.
- Equity index ETF’s are funds whose unit price
is derived from basket of capital market
securities.
- These baskets of securities differ depending
upon the nature of ETF. Ex- Nifty BeES (Index
ETF) , QNIFTY(Index ETF)

12. Exchange Traded Funds
• Bank funds (bank BeES , PSUBNKBEEs ..)
• Gold ETF(Kotak gold, gold BEEs, etc..)
- Gold ETF’s are units representing physical gold
which may be in paper or dematerialized form.These
uinits are traded on the exchange like a singke
stock of the money.
- Easily redeemable into cash.
- removed the disadvantage of extra cost related to
the need for security lockers for physical gold.
- accumulate Gold for social obligations buy a Gold
ETF and you can sell them to purhchase jewellery
or other forms of gold when you desire.

13. Exchange Traded Funds

14. Exchange Traded Funds
Why to Invest in Gold ETF?
 Economically secure asset
- an asset which is no one’s liability , hence no risk
of inflation or repudiation.
 Interconvertible liquidity
- Unaffected by asset controls or asset freezes.
 High public confidence
- Most central banks have increased gold as a
percentage of total reserves in the previous decade.

15. Exchange Traded Funds
• Liquid funds( liquid BEEs, HDFC LF,
etc)
• Oil ETF ( oil service HOLDRS T, USA oil
etc)

16. THANK YOU