The index advantage & ETF revolution How ETFs work? Key selling points The expanding menu of ETFs What are the risks in ETF? Effective uses of ETFs in asset allocation SGX-listed ETFs Going forward…..
The ETF Revolution
Indexing or ‘passive management’ involves investing in a group of securities that represent the composition of a broad stock market or industry sector & designed to track closely the performance of the selected underlying asset or index ETFs combine the benefits of traditional index fund investing, with the liquidity & mass market appeal of buying & selling individual stocks Investors are increasingly waking up to the fact that index returns can be cheaply acquired via ETFs Amex pioneered the creation of SPDR in 1993 & is followed by the debut of DIAMONDs, QUBEs, iShares, VIPERs, iShares, Powershares, Proshares….on NYSE, AMEX & Nasdaq Different ETFs have have different pricing structures e.g. 1/10 of the index value or some other set fraction
AUM of Global & US ETFs
US ETF Turnover
ETFs are in as bear rules
What are ETFs?
ETF represents shares of ownership in either index funds or trusts that are listed on an exchange & hold portfolios of common stocks or bonds which are designed to track the price & yield performance of their underlying indexes ETF gives investors the opportunity to buy or sell an entire portfolio of stocks or bonds in a single security, as easily as buying or selling a share of stock While mutual funds are priced once after the end of each trading session, ETF prices change throughout the day because they trade like shares. Also can be sold short & bought on margin. It add the flexibility, ease & liquidity of stock trading to the benefits of traditional index funds Equity ETF holders are eligible to receive their pro-rata share of dividend, if any, accumulated on the stocks/bonds held in the ETF
ETF structure
How ETFs work?
Unlike open-end mutual funds, ETF shares aren’t sold/redeem directly to/from the public for cash Instead, fund companies exchange large blocks of ETF shares called creation units for actual shares of the underlying stocks turned in by ‘authorized participants’. Most transactions are at least 50,000 ETF shares or multiples thereof After an ETF creation unit is issued, the institution either hold the unit in their portfolio or break it up into individual ETF shares & sell to the general public via the stock exchange When an institution redeems an ETF creation unit, they receive individual securities + a cash portion from unpaid dividends Such in-kind transactions help to minimize tax liability to the ETF as no capital gain will be realized on redemption
Efficiency with ease in asset allocation (access to a wide range of asset classes, markets & sectors) & instant exposure to a diversified portfolio at lower cost, management fees & taxation Transparency of underlying securities in the portfolio which replicates the performance of the benchmark index or exposure desired. Each ETF share is priced continuously & trades close to its iNAV Flexibility with small capital outlay, choice of long or short exposure, no load fees, ability to buy & sell anytime throughout the trading day & be margined Acts like a Fund, Trades like a stock
ETFs guaranteed mediocrity?
Are ETFs safe? Like actively managed funds, ETFs could also lose ground to the market. But they lose by less than other funds, which makes them a winning investment Some of the lowest cost index funds charge <0.3% p.a. in annual expense & doesn’t incur much trading cost because they rarely buy & sell stocks Bottomline : Are average returns better than below average returns? For long term investors, ETFs provide a broadly diversified exposure, keep investment costs to a bare minimum & may be tax efficient to some investors.
The Expanding Menu of ETFs
SPDRs (1993)
DIAMONDs (1997)
Qubes (1999)
Sector Performance
Sector/Industry based
Select Sector SPDRs unbundle the the S&P 500 into 9 SPDRs (info technology & telecoms lumped under technology SPDR), representing 10 sectors classified according to GICS. DJ & FTSE use the Industry Classification Benchmark (ICB) to classify into 10 industries, 18 supersectors, 39 sectors etc… Competing index providers divide markets with different classifications & depth of offering increases with global industry ETFs Uses of industry sector ETFs: To fill an industry gap in a portfolio that isn’t covered by other investments To gain greater exposure to an industry sector that you expect to outperform the broad market To hedge against a concentrated stock position
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