EXCHANFE TRADED FUND ( ETF ) “New Investment Opportunity In The Capital Market''

1. EXCHANFE TRADED FUND ( ETF )
“New Investment Opportunity In The Horizon”
MONEY
& CAPITAL MARKET
New Investment Product in Capital Market of Bangladesh
LOGO

2. PREAMBLE
 Within twenty two years Exchange Traded Funds (ETFs) have emerged as
one of the most popular investment for both institutional and individual
investors throughout the world. In line with the global market scenario,
Bangladesh Securities and Exchange Commission (BSEC) has also come
forward to introduce this new product in the capital market of Bangladesh.
After demutualization of stock exchanges both the stock exchanges also
showed their keen interest to lunch ETF as their first new product in the
market. This article therefore, is prepared. As an effort to share the
knowledge of ETF with the capital market investors.
E X C H A N G E T R A D E D F U N D ( E T F )

3. What is an ETF?
An ETF, or exchange traded fund, is a marketable security that tracks an index,
a commodity, bonds, or a basket of assets like an index fund. Unlike mutual
funds, an ETF trades like a common stock on a stock .
An ETF can be described as a pooled investment vehicle with units that can be
bought or sold throughout the trading day on a stock exchange at a market-
determined price that is close to its net asset value (NAV).
E X C H A N G E T R A D E D F U N D ( E T F )

4. • ETF offers the advantages of both mutual fund and stock, which can be understood
from the following figure:
Mutual Fund Stock
 Simplicity
 Transparency
 Risk Control
 Diversification
 No tenure or size
limitation (open-
ended fund)
+
 On exchange intraday trading
 Trading flexibility
 Trading Strategies(Hedging,
diversified exposure to
market, buying and holding,
investing)
= ETF
E X C H A N G E T R A D E D F U N D ( E T F )

5. Who owns the assets of ETF?
Similar to mutual funds, ETF owns the underlying assets(shares of stock, bonds, oil future gold
bars, foreign currency, etc.) and offers investors a proportionate share in a pool of stocks, bonds,
and other assets. Shareholders do not directly own or have any direct claim to the underlying i
nvestments in the fund; rather they indirectly own these assets.
What returns investors may expect from ETF?
ETF unit holders are entitled to a proportion of the profits, such as earned interest or dividend
paid, and they may get a residual value in case the fund is liquidated.
Structure of ETF:
The ETF structure can be corporate type or investment trust type. The actual investment vehicle
structure will vary by country, and within one country there can be multiple structures that
co-exist.
E X C H A N G E T R A D E D F U N D ( E T F )

6. How ETFs Differ with Mutual Fund?
Forecast ETFs Mutual Funds
Trading time Trade during trading day Trade at closing NAV
Cost Low operating expenses Operating expenses vary
Investment amount No investment minimums Most have investment minim
ums
Tax efficiency Tax-efficient Less tax-efficient
Sales load No sales loads May have sales load
E X C H A N G E T R A D E D F U N D ( E T F )

7. Milestones of ETF
Year ETF Event
April 1995 Second ETF Debuts
March 1996 Shares Debuts International ETF
December 1998 Sector SPDRs Debut
July 2002 Bond ETF Debut
November 2004 Gold SPDR (GLD) Launches
June 2006 ETNs Enter the Fray
November 2009 Schwab Debuts commission Free ETFs
December 2010 ETF Assets Hit $1 Trillion Mark
E X C H A N G E T R A D E D F U N D ( E T F )

8. Global ETF Market Scenario
The U. S. market – with 1,411 funds and nearly $2.0 trillion in assets
Under management at year – end 2014 – remained the largest in the
world, accounting for 73 percent of the $2.7 trillion in ETF assets
worldwide. In comparison to the US; ETFs in many developing markets
are still in the infancy. Growth rates in Asia Pacific are among the
highest in the world
(assets expected to continue expanding at 20 – 30% per annum).
E X C H A N G E T R A D E D F U N D ( E T F )

9. Global ETF Market:
0
2000
4000
6000
8000
10000
12000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Number of ETPs
Europe
US, Europe, Asia Pacific & RoW ($)
US ($)
Europe ($)
Asia Pacific ($)
RoW ($)
E X C H A N G E T R A D E D F U N D ( E T F )

10. Factors Driving ETF Growth
The following factors are behind the accelerated world – wide growth of
ETFs:
 Large verity of indices of Equity, Fixed Income, and Commodity.
 Facilitation of investors’ education and training.
 Special market campaigns by many on-line brokers.
 Major fund platforms.
 Regulatory changes in the US, Europe and many emerging markets.
 Development and growth of investment styles.
E X C H A N G E T R A D E D F U N D ( E T F )

11. Types of ETF
Index fund: Most ETFs are index funds that attempt to replicate the performance of a Specific
index.
Stock ETF: A Security that tracks a particular set of equities, similar to an index.
Bond ETF: Exchange Traded Funds that invest in bonds are known as bond ETFs.
Commodity ETF: Invest in commodities, such as precious metal, agricultural
product, or hydrocarbons.
Currency ETF: Invests in a single currency or a basket of a currencies.
Actively Managed ETF: An exchange-traded fun that has a manager or term making decisions
on the underlying portfolio.
Leveraged ETF: Leveraged ETFs attempt to archive return that are more sensitive to market
movements than non-leveraged ETFs.
Inverse ETF: Inverse ETFs are designed to seek daily investment results that correspond to the
inverse daily performance of their underlying index or benchmark.
E X C H A N G E T R A D E D F U N D ( E T F )

12. Parties of ETF
Stock Exchange:
To provide trading platform and act as index provider.
Asset Management Company (AMC):
To manage the ETF in accordance with investment
objectives and TRUST Deed.
Sponsor:
To initiate the fund through contributing the initial
subscription requirement (I.e. minimum 10% of the
target size of the fund).
Trustee:
To pool after the funds properly and ensure that AMC
acts in accordance with the investment objectives, Trust
deed, prospectus and securities law
Custodian:
To be appointed by AMC to hold underlying Securities
and provide Depository Participant Services for creation
and redemption.
CDBL:
To provide platform for settlement, delivery and transfer
of securities through computerized book entry system.
Stock Broker:
Stock broker(s) designated by AMC will facilitate
off-loading of ETF units in the secondary market.
Authorized Participants (AP):
Also known as market makers, any stock broker
appointed by the Asset Manager shall work as like selling
agent and also play role of Market Makers.
E X C H A N G E T R A D E D F U N D ( E T F )

13. How ETF Works:
1.Authorized participants (APs): Authorized participants (APs) only permitted for creation
and redemption of units directly with fund using both "portfolio of securities" and
"cash".
2. Primary Market Operation: Creation and Redemption process directly with the fund at
net asset value (NAV) is called "Primary Market Operation"
3. Secondary Market Operation: Trading at the exchange for buy and sell of units both for
retail investors and Authorized.
4. NAV and Intraday Indicative Value (IIV): Each ETF must calculate Daily NAV and In
traday Indicative Value (IIV).
5. Arbitrage opportunities: Trading Prices at Premiums and Discounts of NAV creates
"arbitrage opportunities" for Market Makers.
E X C H A N G E T R A D E D F U N D ( E T F )

14. Benefit ETF Offers to Investor
Buying and selling flexibility—
ETFs are priced and can be purchased and sold
throughout the trading day just like ordinary
shares with real time trading.
Portfolio diversification—
ETFs provide diversification to an investor’s overall
portfolio with lowest cost.
Minimum trading unit –
Minimum trading lot is just one unit. Can be
bought with margin and one can place limit order.
Expense ratios-
In general, the underlying fees and expenses of
ETFs are less than mutual funds.
Tax Efficiency
Investors have been attracted to ETFs because they
have lower portfolio turnover than actively
managed funds and fewer realizations of capital
gains. The ETF does not incur any tax when the low
basis securities are redeemed.
Transparency— The price at which an ETF trades in
the secondary market is a close approximation to the
market value of the underlying securities held in its
portfolio. This fairly tight relationship makes ETFs a
convenient and easy option for investors.
Ease in transfer to BO account-
Can be easily delivered to BO account.
E X C H A N G E T R A D E D F U N D ( E T F )

15. ETF managers may used different
strategies to achieve their goal, but
in general they do not have the
discretion to take defensive
positions in declining markets.
“Market Risk:
Tacking Errors:
Tacking error can arise due to
factors such as the impact of
transaction fees and expenses
incurred to the ETF.
Risk Associated with ETFs
Liquidity Risk:
Market makers provides liquidity to
facilitate trading in ETFs are supported
by one or more market makers, there is
no assurance that active trading will be
maintained.
“
“
E X C H A N G E T R A D E D F U N D ( E T F )

16. Regulatory Risk:
Synthetic ETFs are attracting regulatory attention from the
FSB, the IMF, and the BIS. Areas of concern include the
lack of transparency in products and increasing complexity;
conflicts of interest; and lack of regulatory compliance.
Counterparty Risk:
A synthetic ETF has counterparty risk, because the
counterparty is contractually obligated to match the
return on the index. The deal is arranged with
collateral posted by the swap counterparty.
“
“
E X C H A N G E T R A D E D F U N D ( E T F )

17. Findings Regarding Global ETFs
1. ETFs continue to grow rapidly.
2. The industry’s success depends on delivering liquidity in good times and bad.
3. Efficient centralized settlement would be a game-changer if it can be achieved.
4. Innovation is vital to success fund launches, but needs to be handled with care.
5. Attitudes to pricing are becoming more sophisticated as ETF markets develop.
6. Big incumbents remain dominant, but competitive dynamics are heating up in many
7. Improving distribution is crucial to the next phase of growth, especially in retail
8. Growing acceptance of regulation is balanced against its increasing complexity.
9. The industry needs to take a proactive approach to managing its growing tax risks.
10. Better understanding and engagement with service providers would benefit the whole industry.
E X C H A N G E T R A D E D F U N D ( E T F )

18. SWOT
of
ETFs
STRENGTH
Innovative culture
Asset leverage
Financial leverage
Weaknesses
 Weak Management
Weak Cost Structure
Opportunities
Greater Looser regulations
Innovation
New products
Threats
International competitors
changes in consumers’ tastes
Volatile costs
E X C H A N G E T R A D E D F U N D ( E T F )

19. CONCLUSION
• ETFs are now considered attractive investments avenue because of their low
operating costs, diversified & risk averse holdings liquidity, option of tax efficiency
and stock like features. In EY Global ETF Survey 2015 and beyond, it has been
envisaged that due to low costs, flexibility, convenience, liquidity, and transparency
the assets under the portfolios of ETFs would increase significance over the coming
year. In the same survey ETF market growth of 10-15%, 20-25% and 225-30% for
US, EU and Asia respectively has been forecasted for the coming year. BSEC is
planning to introduce at least one ETF in each of the exchange by June 2016. In this
regard commission formed three member Core committee. Presently, the core
Committee is also working to formulate the necessary rules and guidelines for
introducing ETF in Bangladesh.
E X C H A N G E T R A D E D F U N D ( E T F )

20. E X C H A N G E T R A D E D F U N D ( E T F )
THANK YOU