Al kesh Dinesh Mody Institute

For Financial & Management Studies

UNIVERSITY OF MUMBAI

Kalina, Santacruz (E), Mumbai-400 098

TY-MFSM 2010-2011

EXCHANGE TRADE FUNDS

 EXCHANGE TRADE FUNDS
BRIEF HISTORY AND GROWTH
S&P Depository Receipts (Spiders) hit the market in 1993.
In the past 12 months 252 new ETFs were launched worldwide and assets
increased globally by 46%.
There are about 665 equity, bond, commodity, and currency ETFs, with
combined assets of $525 billion
WHAT IS AN ETF?
Open-End Mutual Fund
A fund that tracks an index or basket of investments, but can be traded
like a stock.
Are index funds, which are listed and traded on major stock exchanges
around the world.
Not actively managed.
 BENEFITS OF ETFS
Can be easily bought / sold like any other stock on the exchange through
terminals spread across the country
 Can be bought / sold anytime during market hours at prices that are
expected to be close to actual NAV of the Scheme.
No separate form filling for buying / selling units. It is just a phone call to
your broker or a click on the net (Online Trading)
 Ability to put limit orders
 Minimum investment for an ETF is one unit
Flexibility: can be used as a tool for gaining instant exposure to the
equity markets, hedging or for arbitraging between the cash and futures
market
Helps increasing liquidity of the underlying cash market
Investor can get consolidated view of his investments in a demat form
 THE DIS-ADVANTAGE
• Investors need to have a demat and a trading
account
• ETFs they have to pay a brokerage (usually
around 0.50%). This is considered high for a
new short term Investor
 ETFS V/S STOCKS & MUTUAL FUND
Functionality ETFs Stocks MF
Unit
Real time trading and pricing throughout Yes Yes No
market hours
Ability to put limit orders Yes Yes No
Can be purchase through NSE broker and/or Yes Yes No
online trading a/c
Can be traded real time on the NSE Yes Yes No

Is Arbitrage possible between Futures and Yes Yes No

Cash Market
Is Diversification possible with a single unit Yes No Yes
Returns at per with the market/index Yes No No
Intra day trading Yes Yes No
Paper Less investing Yes Yes No
Exit Load No No Yes
 HOW TO INVEST IN ETFS
• Trading in Gold ETF is very simple.
• It is similar to how you trade in equity shares.
• You can trade from your existing trading account with your broker
or register yourself with a broker having membership of the NSE,
fill up the KYC form, open a demat account, post margins and then
commence trading.

Log into your

Select an ETF Trading A/c or call Place an order
your NSE broker

ETFs are in dematerialized form and settled like any other

share in the T + 2 rolling settlement.
 What makes ETF an attractive investment tool?
An Index fund with….

1.Fully funded portfolios, tracking an index performance

2. No subscription/redemption fees on the exchange
3.Full transparency for the fund components
4. Official NAV calculated on a daily basis

Listed and tradable on exchange…

1. Quoted in real time as share on stock exchange
2. Liquidity: Multiple market makers display bid offer spreads
 ETFS-SOME CLASSES
• EQUITY INDEX ETF
• GOLD ETF
• COMMODITY ETF
• CURRENCY ETF
 EQUITY INDEX ETF
This is an index ETF that tracks an Index like Nifty, CNX Junior
Nifty, CNX Bank Nifty which means that it holds the stocks in the
same proportion as they are present in the Nifty index, Bank
stocks likewise.

Equity index ETFs are funds whose unit price is derived from
basket of capital market securities.

These baskets of securities differ depending upon the nature of

ETF.
 THE ADVANTAGES - EI
• Buy the Index as a share.
• Real time NAV and prices.
• No Hassles of margin calls (like futures).
• Low expense ratio
• Less Burden of Taxation (Short and Long Term
Capital Gains)
• Listed & Treaded on NSE with a minimum lot size of
1 unit.
 GOLD ETF
MEANING

• Gold ETFs are units representing physical gold, which may be

in paper or dematerialized form. These units are traded on
the exchange like a single stock of any company.
USES OF GOLD FTFS

• To keep Gold as part of your portfolio invest in Gold ETFS.

• Accumulate Gold for social obligations buy a Gold ETF and you
can sell them to purchase jewellery or other forms of gold
when you desires.
 ADVANTAGS OF GOLD ETF

• Price approximately equal to one gram of Gold.

• Backed by physical Gold holding of 0.995 purity.
• No wealth Tax
• Long term capital gains after one year.
• No storage issues & fear of theft.
• Near wholesale price for buying and selling.
• Listed and Traded on the NSE with a minimum lot
size of 1.
 COMMODITY ETF
– An exchange traded fund that invests in
commodities, such as precious metals or
agricultural products, oil.
– commodity exchange traded funds are index
funds, they track non-securities indices
– Investors can make profits from movements in a
variety of commodities
– Commodity ETF is prone to short term speculation
– These ETFs mirror the actual price of the
commodity
 CURRENCY ETF
– A currency ETF is an exchange traded fund that tracks a
foreign currency
– The first currency exchange traded fund was launched in
2005 in New York. It was called the Euro Currency Trust .
– This would appreciate in value with the strengthening of
the Euro against the US dollar
– Currency ETFs are used to gain exposure to the world’s
largest financial market – the forex market.
– These exchange traded funds provide manufacturers the
opportunity to hedge against currency losses
– Since it is not easy to predict the direction of a currency, a
currency ETF is a highly risky fund.
 MOST IMPORTANT
Disclaimer

Market conditions can lead to substantial loss or Profit. Investors

are advised to seek adequate product and market knowledge
before investing or trading in ETFs.
Every investment advice must be properly analyzed before
participating. The Issuer of advice should not be held responsible
for any decision taken by the investor

We, students of TY MFSM Sem V at ADMI have presented

general information based on the research carried over Internet.
The information may change as we progress in to future