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A presentation on: General Applications of Exchange Traded Funds Justin Pascoe Director of Investments 20. 8. 2002.

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Presentation on theme: "A presentation on: General Applications of Exchange Traded Funds Justin Pascoe Director of Investments 20. 8. 2002."— Presentation transcript:

1 A presentation on: General Applications of Exchange Traded Funds Justin Pascoe Director of Investments

2 2 Table of Contents 1.What are ETF s 2.Why have ETFs become so popular 3.Users and Applications of ETF 4.Global Developments of ETF 5.Developmental Challenges 6.Conclusion

3 What are ETFs?

4 4 Characteristics Commingled fund structure Listed on the exchange Trade like ordinary shares Passively managed against an index Usually priced at a fraction of the index e.g: TraHK is 1/1000th, SPDR is 1/10th, QQQ is 1/40th Contribute and redeem in-kind

5 5 In-kind Subscription/Redemption Investor ETF Creation Redemption Share basket Units Share Basket Investor ETF Not as simple as taking a mutual fund and listing it on the exchange Special in-kind creation and redemption mechanism

6 6 Importance of in-kind Creation and Redemption Reduces transaction costs borne by the fund that result from investors’ activities  The ordinary mutual fund has to acquire/sell stocks in its portfolio when investors buy into and/or redeem from the fund, thereby incurring transaction costs  In-kind mechanism contributes to the lowering of the expense ratio of the fund Facilitates arbitrage activities  Specialists, market makers and arbitrageurs compete to capture pricing discrepancies, which results in the ETF trading at its fair value Hence increases the liquidity of ETFs

7 7 Arbitrage Activities Unit price >NAV Unit price


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