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EXCHANGE TRADED FUNDS (ETF)

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Nathalie Oosterlinck

on 16 December 2013

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Transcript of EXCHANGE TRADED FUNDS (ETF)

EXCHANGE TRADED FUNDS (ETF)
Advantages - Disadvantages
How and where to buy an ETF
*
Where
: Through a broker
-> negative : if you invest a small sum of money

*
How
:
1. Get a broker or brokerage account
2. Research different ETF options
3. Check up on fees and expenses for an ETF
4. Place trades
5. Keep good records
Types
have index -> have ETF
Examples:
* Gold ETFs
-
Invest in gold stocks, or gold bullion
- Move in rough tandem with gold prices.

* Industry ETFs
- Portfolio of stocks representing an industry, such as
energy and oil, technology, mining, transportation,
health care, and so on.

* Country ETFs
- Cross-section of industry in a given country

* Currency ETFs
- These securities seek to capture the returns of foreign
currencies.

Risks
Definition & History
1989:
Index Participation Shares for the S&P 500
1993
: first ETF trade
2002
: 102 funds
2009
: 1000 funds
2011
: 1400

Exchange traded funds (ETFs) are funds that track indexes (like NASDAQ, Dow Jones ... )

Features:
- Single transactions
- Passive management
- Flexibility
- No dividend payment
*
Trading at discount or premium to its NAV
- Price discrepancy
- Caused by supply and demand factors
- May occur during periods of high market volatility

*
Foreign exchange & jurisdiction risk
- Fluctuation
- Specifically for overseas ETF
- Different or diminished investor protection

*
Risks involved with leveraged ETF’s
- ETF fund manager may be unable to carry out their
short-selling strategy

Diversification of an index fund & flexibility of a stock
Cost-effectiveness
Lower risks
Simplicity

Costs
* Brokerage commission
- Every time you buy or sell a stock
- Lump sum transactions advised (1 payment)

* Low operation and management fee
- Annually
- Significant over long term

* Cost of liquidity
- Bid-ask spread
- Important when trading regularly

* Capital gain taxes
- Only paid when the entire ETF is sold
ETFs are Not Like
Indexes or Equities
ETF Names
The Bottom Line
Low Trading Volumes
Long Investment Horizon
Inactivity

Price & Net Asset Value
NAV = (Assets – Liabilities)/Shares Outstanding

* Why?
Compare to other funds, to calculate performance
statistics

- Component prices change throughout the trading
day


Active vs Passive
* Difference between the actions of one individual
versus the action of a group as a while

* Active management:
attempt to “beat the market” as
measured by a particular benchmark or index

* Passive management
= indexing
Investment management approach based on
purchasing exactly the same stocks and bonds in the
same proportions as an index

ETFs vs Mutual funds
5 POINTS OF COMPARISON:

* Tax benefits
- ETF: Only incur capital gain taxes when the fund is
sold
- MF: Gain taxes, incurred as the shares within the fund
are traded during the life of the investment
* Simplicity
- ETF: One price with one transaction, you are a trade
away from opening or closing a position
- MF: Shares in the assets are constantly being traded to
a target price and seek a desired performance
-> multiple price and trade




* Cost-effectiveness
- ETF: More simplistic -> more cost-effective
- MF: Shares actively traded + actively managed
-> large management fees
* Investing flexibility
There are so many types of ETFS for
investors, tracking the performance of a
certain index or achieving a financial goal
may be more attainable than with MF
* Transferability
Whenever a managed portfolio switched to a
different investment firm
-> complications arise with MF
Sometimes the fund positions: closed out
before a transfer can take place.

QUESTIONS???
Sources
http://www.nasdaq.com/investing/etfs/what-are-ETFs.aspx#ixzz2lInYW0xl
http://etf.about.com/od/benefitsofetfs/tp/Nine_ETF_Benefits.htm
http://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp
http://etf.about.com/od/riskofetfs/tp/Five_ETF_Dsvntgs.htm
http://www.investmentgeekz.com/investment/main-disadvantages-of-etfs.html
http://www.investopedia.com/terms/e/etf.asp
http://money.cnn.com/retirement/guide/investing_ETFs.moneymag/index4.htm?iid=EL
http://www.wikihow.com/Buy-Exchange-Traded-Funds
http://www.investopedia.com/articles/exchangetradedfunds/11/ten-popular-etf-types.asp
http://www.investopedia.com/university/exchange-traded-fund/etf4.asp
http://www.kotaksecurities.com/ks/horizon-share-market-newsletter/october-01-2011/stock-market.html


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http://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
http://www.investopedia.com/terms/d/diversification.asp
http://www.ft.com/intl/cms/s/0/ae2fbf98-04e5-11e3-9e71-00144feab7de.html
http://www.ft.com/intl/cms/s/0/f2fd6302-e61c-11e1-a430-00144feab49a.html
http://online.barrons.com/article/SB50001424053111904897104579157640947040178.html
http://online.wsj.com/news/articles/SB10001424052748703837004575012772071656484
http://www.phillipetf.com/ReadPage.aspx?id=65
http://www.nytimes.com/2013/04/07/business/mutfund/exchange-traded-funds-tracking-error-is-often-overlooked.html?_r=0
http://etf.about.com/od/etftaxes/a/ETF_Tax_Benefit.htm
http://beforeitsnews.com/financial-markets/2013/04/active-vs-passive-investment-management-2542320.html
https://clients5.brinkercapital.com/Brinker/Portal/Web/CMS/Images/Active_Passive.pdf
http://etf.about.com/od/benefitsofetfs/tp/ETF_Mutual_Fund.htm
*
Market risk
- Volatility of specific underlying assets which the ETF tracks
- Understand of fundamentals that drive the prices of assets
- No excessive risk companies included

*
Tracking error
- Difference between a fund’s return and the index’s return
- Variation by asset class
- Main clauses; illiquidity and transaction costs

*
Liquidity risk
- If ETF is not liquid -> hard to sell
- Spread:

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http://www.nasdaq.com/investing/etfs/
Full transcript