UNIT

ETFs

Names of Sub-Units

Types of ETFs, ETF Managers, Common Investor v/s ETFs, Scope and Future of ETFs, Taxation in ETFs

Overview

This unit begins with the introduction to ETFs, types of ETFs and ETF managers. Further, it explains
common investors versus ETFs, scope and features of ETFs and taxation in ETFs.

Learning Objectives

In this unit, you will learn to:

 Explain introduction to exchange traded funds
 Describe types of ETFs
 Define ETF managers
 Discuss common investors v/s ETFs
 Indicate scope and future of ETFs
 Elaborate taxation in ETFs
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Learning Outcomes

At the end of this unit, you would:

 Analyse introduction to exchange traded funds
 List types of ETFs
 Assess ETF managers
 Examine common investors v/s ETFs
 Demonstrate scope and future of ETFs
 Evaluate taxation in ETFs

Pre-Unit Preparatory Material

 https://www.investopedia.com/terms/e/etf.asp
 https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-
funds-and-exchange-traded-2

13.1 INTRODUCTION
A pooled investment security called an exchange-traded fund (ETF) functions very similarly to a mutual
fund. ETFs often follow a certain sector, index, commodity, or other asset, but unlike mutual funds, they
can be bought or sold on a stock exchange just like conventional stocks.

Since they combine elements of exchange-traded funds and open-end mutual funds, ETFs are in fact
hybrid funds. Every day, intraday pricing is offered for ETFs that are closed-end funds (e.g., unlimited
share creation) and funds (as opposed to mutual funds, which have a defined price). ETFs are traded on
a stock exchange and enable investors to transact at market prices.

To purchase or sell stock depending on an index’s performance the whole portfolio ETFs are meant to
mimic the holdings of a mutual fund, its underlying portfolio’s performance and yield ETFs are traded
through brokerage firms and investors may buy and sell them. They trade stocks of any public firm
using their accounts:
 A trade exchanged store (ETF) is a bushel of protections that exchanges on a trade very much like a
stock does.
 ETF share costs change the entire day as the ETF is traded; this is not the same as common assets,
which just exchange once every day after the market closes.
 ETFs can contain a wide range of ventures, including stocks, products, or bonds; some proposition
U.S.- just possessions, while others are global.
 ETFs offer low cost proportions and less dealer commissions than purchasing the stocks separately.

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An ETF is referred to as a traded fund since it trades much like stocks do. As offers are traded accessible
during the trading day, the price of an ETF’s portions will fluctuate. This is not normal for common assets,
which are not exchanged on a trade and which exchange just once each day after the business sectors
close. Furthermore, ETFs will quite often be more savy and more fluid contrasted with shared reserves.

Instead of holding just one fundamental resource, like a stock, an ETF holds a variety of them. ETFs are
a well-known option for improvement because they contain a variety of resources. This allows ETFs to
hold a variety of speculative assets, such as stocks, commodities, bonds, or a mix of these.

An ETF may own hundreds or thousands of equities across numerous businesses, or it may not be related
to any one particular sector or industry at all. Some subsidies concentrate only on U.S. contributions,
while others have a global perspective. For instance, banking-focused ETFs might include holdings of
various banks throughout the whole industry.

An ETF is an attractive security, meaning it has an offer value that permits it to be effectively traded on
trades over the course of the day and it very well may be undercut. With the exception of those instances
where subsequent principles have changed their administrative requirements, the majority of ETFs in the
United States are set up as open-finished reserves and are governed by the Investment Company Act of
1940. Open-end reserves do not place a cap on the number of financiers who can support the item.

A money market fund permits financial backers to exchange portions of ETFs similarly as they would
exchange portions of stocks. Active financial backers might pick a customary money market fund, while
financial backers hoping to adopt a more aloof strategy might decide on a robo-counsel.

Robo-guides frequently remember ETFs for their portfolios, in spite of the fact that their decision to
whether to zero in on ETFs or individual stocks may not really depend on the financial backer.

Subsequent to making a money market fund, financial backers should subsidise that record prior to
putting resources into ETFs. The specific ways of financing your money market fund will be rely upon
the agent. In the wake of subsidising your record, you can look for ETFs and make trades similarly that
you would portions of stocks.

Utilising an ETF screening tool is probably the best approach to reduce the number of ETF options you
have. These tools are widely available from dealers as a way to calculate the substantial amount of ETF
contributions. You can regularly look for ETFs as per a portion of the accompanying models:
 Volume: You can consider the popularity of certain assets by looking at the trading volume during a
given time period; the larger the volume, the easier it might be to swap that asset.
 Costs: The less of your endeavour is dedicated to regulatory costs, the lower the cost ratio. While
it may be tempting to always seek out investments with the lowest cost ratios, sometimes more
expensive investments, such as well-managed ETFs, have sufficient execution to justify their higher
fees.
 Execution: While past execution isn’t a sign of future returns, this is in any case a typical measurement
for looking at ETFs.

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 Possessions: The arrangement of various assets regularly factor into screener apparatuses too,
permitting clients to look at the changed property of every conceivable ETF venture.
 Commissions: Many ETFs are commission-free, meaning there are no fees to complete the exchange
when exchanging them. Whatever the case, it is worth checking if you think this could be a deal-
breaker.

Benefits and Disadvantages of ETFs

Since it would be expensive for a financial backer to buy all of the companies housed in an ETF portfolio
completely, ETFs provide lower expenses. Due to the fact that financial backers only need to complete
one exchange for buying and one exchange for selling, there are fewer dealer commissions required.
Typically, trade facilitators charge a commission. A few dealers considerably offer no-commission
exchanging on specific minimal expense ETFs, decreasing expenses for financial backers significantly
further.

ETFs typically have cheap fees since they follow a list. For instance, if an ETF tracks the S&P 500 Index, it
might include all 500 equities in the S&P, making it a less time-concentrated reserve that is not actively
managed. However, not all ETFs track a file in an unbiased manner, which could lead to a higher cost
ratio.

Pros:
 Admittance to many stocks across different enterprises
 Low expense proportions and less dealer commissions
 Risk the board through enhancement
 ETFs exist that attention on designated businesses

Cons:
 Effectively oversaw ETFs have higher expenses
 Single-industry-centered ETFs limit enhancement
 Absence of liquidity upsets exchanges

Effectively Managed ETFs

There are also ETFs that are well-managed, where the portfolio managers are more involved in trading
company shares and altering the asset’s property. Regularly, an all the more effectively overseen asset
will have a higher cost proportion than latently oversaw ETFs. To ensure that an ETF merits holding,
financial backers should decide how the asset is made due, whether it’s effectively or inactively made
due, the subsequent cost proportion and the costs versus the pace of return.

13.2 TYPES OF ETFS

Following are the types of ETFs:

1. Equity Funds: Most ETFs monitor value areas or files. Some record ETFs completely replicate a list,
but others use agent examining, which errs by using futures, choice and trade contracts and the

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occasional acquisition of stocks not listed in the list. Assuming that this testing gets excessively
forceful, it can prompt many mistakes. Any ETF with a these errors above 2% is viewed as effectively
made due. As ETFs become increasingly particular, this is the sort of thing financial backers ought
to look for.
The multiplication of ETFs gives financial backers an economical method for accomplishing
broadening in their portfolios. There is an ETF for any demand, whether you want to track a
particular segment of the global stock market, a large area, or a niche market. Additionally, others
invest in various measurable businesses, whether you are looking for a small mid or large cap
reserve.
Besides the fact that these assets are accessible for practically any region you need to put resources
into, with more coming to showcase every week, except there are likewise with the overflow of
decisions out there, you genuinely should initially decide your portfolio’s value designation and
afterward, in view of those choices, select ETFs to meet your venture objectives.
2. Fixed-Income Funds: Most monetary experts suggest that you put a piece of your portfolio in fixed-
income funds like bonds and bond ETFs. This is on the grounds that bonds will generally lessen a
portfolio’s instability, while likewise giving an extra stream of pay. The deep rooted question becomes
one of rates. What sum ought to go to values, fixed pay and money? This is generally alluded to as
resource portion. Likewise with value assets, there are many security reserves accessible. Complete
security market ETFs, which invest in the entire U.S. securities market, should be considered by
investors who are unsure of what form of investment to make.
3. Item Funds: Prior to putting resources into item ETFs, it’s critical to comprehend the reason why you
are keen on products in any case. All things considered, there hasn’t been much of a link between
values and product costs. The categorisation of critical resources is advised to account for 90% of
a portfolio’s return. Nevertheless, it isn’t sufficient to include stocks, bonds, cash, goods and real
estate in your portfolio. You should also improve in each of those resource categories.
ETFs fill that gap, to be specific. Investors can invest in a product stock ETF, which invests money
in the typical shares of product manufacturers, or a commodity ETF, which monitors changes in
the value of particular commodities like gold or oil. The last choice is closely tied to stocks, whilst
the first has little connection. In the event that your portfolio as of now contains values, a straight
product ETF might check out.
4. Currency Funds: Financial backers seeking to protect the value of their U.S.-branded ventures will
search for options that provide protection against a declining dollar as the world’s monetary
standards become more unreliable and the U.S. dollar’s role as a reserve currency gradually fades.
One choice is to put resources into unfamiliar stocks or unfamiliar stock ETFs. Nonetheless, this will
not give you resource class expansion in light of the fact that unfamiliar stocks are for the most part
corresponded with U.S.
Stocks. A superior option is to put resources into heterogeneous money ETFs. Whether it’s a single
cash position or one with a larger concentration, the objective is to safeguard your portfolio from a
declining US dollar.

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However, if you own unfamiliar stocks and the U.S. currency is strengthening, you can protect the
value of that asset by shorting an ETF that holds similar cash.
It’s vital that cash contributing ought to address a little part of your general investment and is
intended to mellow the blow of money unpredictability.
5. Land Funds: Financial supporters can opt for real estate investment trust (REIT) ETFs. The most
alluring aspect of these assets is the fact that they should pay out 90% of their potential pay to
investors, regardless of whether you choose one that invests in a certain type of land or one that is
more expansive in scope. Despite the increased instability compared to securities, this makes them
extremely attractive in terms of yield.
These assets are an astounding type of revenue, particularly when momentary loan costs and
expansion are close to notable lows.
6. Specialty Funds: As ETFs turned out to be more well known, an assortment of assets arose to meet
each possible venture methodology, similar as what occurred with common assets. Backward
reserves, which profit when a specific record performs poorly and used reserves, which, as the name
implies, can use influence to double or triple a specific file’s profits.

13.3 ETF MANAGERS

Various elements go into deciding the average everyday exercises and occupation responsibilities
regarding an ETF portfolio director. Among these elements are such things as the fundamental kind
of asset being made due, whether an effectively overseen ETF or one participates in inactive file
contributing and how huge a care staff the asset chief needs to help with assessing ventures and taking
care of client support errands.

The activities of ETF portfolio managers fall into one of two categories: activities related to choosing
speculative options for the asset or activities involving client/client relations.

Venture Management

The essential work liability of an ETF portfolio supervisor is dealing with portfolio speculations. The
portfolio director is at last liable for settling on the choices on speculations to remember for the asset’s
portfolio. An ETF manager participates in ongoing evaluation of value or other resources, keeps track
of market activity and patterns and keeps an eye out for financial news and circumstances that could
affect the performance of the portfolio. One essential feature of the portfolio board is risk assessment,
especially when major changes to the portfolio’s assets are being considered.

The assignment of settling on venture decisions is impressively more noteworthy with an effectively
overseen ETF instead of one that follows a record. Latent list reserves normally roll out significant
improvements to the portfolio just when the record is occasionally rebalanced. Notwithstanding, in any
event, overseeing record reserves require ordinary venture appraisal.

It is normal for record assets to submit a part of resources for speculations not contained in the hidden
file. The portfolio director settles on those supplemental speculation decisions. A record ETF supervisor
intermittently assesses whether the basic file is the most ideal decision to accomplish the asset’s
speculation objectives.

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In settling on venture choices, a portfolio director is normally helped by a group of specialists, market
investigators and merchants. Group gatherings are held in which investigators or analysts doled out to
cover determined bits of the portfolio make reports and express impressions with respect to existing or
proposed portfolio possessions.

The portfolio director may likewise routinely contact different investigators, outside of the asset’s
group, for data on planned speculations. ETF directors regularly meet with business executives in order
to make educated decisions about investing in a company’s stock, in addition to relying on financial
summaries for a thorough evaluation of value investments.

ETF Managers Versus Shared Fund Managers

The positions of ETF portfolio supervisors and shared store portfolio chiefs are regularly basically
exchangeable besides with respect to one of the significant contrasts among ETFs and common assets.
Investors trade portions of ETFs in open markets on trades throughout the trading day. In contrast,
common asset shares are simply purchased from and issued to the asset guarantor, with exchanges
only occurring once per day, at the closing price.

An ETF portfolio supervisor isn’t troubled with taking care of real exchanges for shares. A common asset
director, be that as it may, needs to deal with share recoveries straightforwardly when investors wish
to sell shares. Huge offer reclamations for the most part require exchanging a portion of the asset’s
possessions to deal with the recovery and the asset administrator needs to choose which property to sell.

13.4 COMMON INVESTORS V/S ETFS

Shared assets and trade exchanged reserves (ETFs) share a ton practically speaking. The two sorts of
assets comprise of a blend of various resources and address a famous way for financial backers to
expand. While shared assets and ETFs are comparative in many regards, they additionally have a few
key contrasts.

A significant distinction between the two is that ETFs can be exchanged intra-day like stocks, while
shared reserves just can be bought toward the finish of each exchanging day in view of a determined
cost known as the net resource esteem.

Shared assets in their current structure have been around for just about a century, with the primary
common asset sent off in 1924. Trade reserves are a relatively new player in the realm of speculation,
with the primary ETF—the SPDR S&P 500 ETF Trust—being launched in January 1993. (SPY).

In previous years, most shared reserves were effectively made due, important store directors settled on
choices about how to dispense resources in the asset, while ETFs were by and large latently overseen and
followed market files or explicit area lists.

That qualification has become obscured as of late, as inactive file subsidises make up a critical extent
of common finances’ resources under administration, while there is a developing scope of effectively
overseen ETFs accessible to financial backers.

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Contrast Between Common Investors and ETFs

Shared reserves were for the most part effectively oversaw in earlier years, with store supervisors
effectively trading protections inside the asset trying to beat the market and assist financial backers
with benefitting; be that as it may, inactively oversaw list reserves have become progressively famous
lately.

Then again, while ETFs were for the most part inactively made due, as they ordinarily followed a market
record or area sub-file, there is a developing number of effectively overseen ETFs.

ETFs and common assets differ significantly from one another in that ETFs can be exchanged much like
stocks while common assets must be purchased at the end of each trading day.

Effectively oversaw shared reserves will quite often have higher charges and higher cost proportions
than ETFs, mirroring the higher working costs associated with dynamic administration.

Common assets are either open-finished exchanging is among financial backers and the asset and the
quantity of offers accessible is boundless; or shut end-the asset gives a set number of offers paying little
mind to financial backer interest.

13.5 SCOPE AND FUTURE OF ETFS

Exchange Traded Funds (ETFs) are filling in prominence due to their effortlessness, savvy way to deal with
contributing and the variety they give. The SEC rule from 2019 enabled the U.S. ETF business grow from
$2.6 trillion pre-pandemic to $3.9 trillion as of June 2021. This is uplifting news for financial backers hoping
to extend their ETF portfolios and recommends there might be further development ahead:
 Trade exchanged reserves (ETFs) have been filling in notoriety because of their convenience, the
variety they give and their savvy way to deal with contributing.
 As of mid-2021, the domestic ETF market in the United States has expanded to around $3.9 trillion.
 According to Dave Nadig, the chief executive of ETF Trends, ETFs would likely exceed pooled reserve
resources in the country during the next five years.

A few ETFs truly do fall flat as they can’t produce an adequate number of resources for store the running
of the business or the speculations. Notwithstanding, ETFs are for the most part generally safe venture
choices and financial backers ordinarily don’t lose their speculations when an ETF closes, as many are
slowed down precise.

With ETFs at present encountering huge development, it appears to be logical that they will keep on
being an appealing choice for financial backers hoping to enhance their portfolios without expanding
the time and exertion they need to spend on dealing with their resources. However, with changing
innovations reshaping the monetary administrations industry, the drawn out fate of ETFs is not yet
clear.

13.6 TAXATION IN ETFS

The simplicity of trading trade exchanged reserves (ETFs), alongside their low exchange costs, offer
financial backers a productive portfolio-improving device. Charge productivity is one more significant

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piece of their allure. Financial backers need to comprehend the assessment results of ETFs so they can
be proactive with their methodologies.

We’ll start by investigating the duty decides that apply to ETFs and the exemptions you ought to know
about and afterward we will show you some cash saving assessment techniques that can assist you
with getting an exceptional yield and beat the market.

Likewise with stocks, with ETFs, you are dependent upon the wash-deal rules on the off chance that you
sell an ETF for a loss and, repurchase it in 30 days or less. A wash deal happens when you unload or
exchange a security an inopportune time and afterward in no less than 30 days of the deal you:
 Purchase a considerably indistinguishable ETF;
 Procure a considerably indistinguishable ETF in a completely available exchange; or
 Gain an agreement or choice to purchase a significantly indistinguishable ETF.

On the off chance that your loss was refused in view of the wash-deal rules, you ought to add the denied
loss to the expense of the new ETF. This builds your premise in the new ETF. This change defers the loss
derivation until the attitude of the new ETF. Your holding period for the new ETF starts around the same
time as the holding time of the ETF that was sold.

Numerous ETFs create profits from the stocks they hold. Standard (available) profits are the most widely
recognised kind of conveyance from an organisation. As indicated by the IRS, you can expect that any
profit you get on normal or favored stock is a common profit except if the paying enterprise tells you
otherwise. These profits are burdened when paid by the ETF.

Qualified profits are dependent upon a similar most extreme expense rate that applies to net capital
gains. Your ETF supplier ought to let you know whether the profits that have been paid are customary
or qualified.

Special Cases - Currency, Futures and Metals

As in basically everything, there are special cases for the overall expense rules for ETFs. A phenomenal
method for pondering these exemptions is to realise the duty rules for the area. ETFs that fit into specific
areas observe the duty guidelines for the area instead of the overall assessment rules. Monetary forms,
prospects and metals are the areas that get extraordinary expense treatment.

Money ETFs

Most money ETFs are as grantor trusts. This implies the benefit from the trust makes a duty responsibility
for the ETF investor, which is burdened as conventional income. They get no exceptional treatment,
like long haul capital additions, regardless of whether you hold the ETF for a considerable length of
time money ETFs exchange cash matches, the burdening specialists might accept that these exchanges
happen over brief periods.

Fates ETFs

These assets exchange wares, stocks, treasury bonds and monetary forms. For instance, Invesco DB
Agriculture ETF (DBA) puts resources into fates agreements of the rural wares - corn, wheat, soybeans

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and sugar - not the hidden items. Gains and loss on the fates inside the ETF are treated for charge
purposes as 60% long haul and 40% present moment paying little mind to how long the ETF held the
contracts. Further, ETFs that exchange prospects keep mark-to-showcase guidelines at year-end. This
implies that undiscovered additions toward the year’s end are burdened like they were sold.

Metals ETFs

Assuming you exchange or put resources into gold, silver or platinum bullion, the taxman thinks about
it as a “collectible” for charge purposes. The very applies to ETFs that exchange or hold gold, silver,
or platinum. As a collectible, on the off chance that your benefit is present moment, it is burdened as
common pay. On the off chance that your benefit is acquired for over one year, you are charged at a
higher capital gains at the pace of 28%.

This implies that you can’t exploit typical capital increases charge rates on interests in ETFs that put
resources into gold, silver, or platinum. Your ETF supplier will illuminate you what is viewed as present
moment and what is viewed as long haul gains or loss.

Charge Strategies Using ETFs

ETFs loan themselves to viable duty arranging techniques, particularly assuming you have a mix of stocks
and ETFs in your portfolio. One normal technique is to finish off places that have loss beforetheir
one-year commemoration. You then, at that point, keep places that have gains for over one year. Along
these lines, your benefits get long haul capital increases treatment, bringing down your duty risk.
Obviously, this applies for stocks as well as ETFs.

Experiencing the same thing, you could claim an ETF in an area you accept will perform well, however
the market has pulled all areas down, giving you a little loss. You are hesitant to sell since you figure the
area will bounce back and you could miss the addition because of wash-deal rules. For this situation,
you can sell the present ETF and purchase another that utilises a comparable however unique list.
Thusly, you actually have openness to the good area, however you can write off the first ETF for charge
purposes.

ETFs are a valuable instrument for year-end charge arranging. For instance, you own an assortment of
stocks in the materials and medical services areas that are confused. Notwithstanding, you accept that
these areas are ready to beat the market during the following year. The methodology is to sell the stocks
for a loss and afterward buy area ETFs which actually give you openness to the area.

Financial backers who use ETFs in their portfolios can add to their profits assuming that they get the
assessment results of their ETFs.

ETFs offer financial backers valuable chances to concede charges until they are sold, like claiming stocks.
Additionally, as you approach the one-year completion of your acquisition of the asset, you ought to think
about selling those with loss before their first year completion to exploit the momentary capital loss.
Likewise, you ought to consider holding those ETFs with gains past their first commemoration to exploit
the lower long haul capital increases charge rates.

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ETFs that put resources into monetary forms, metals and prospects don’t adhere to the overall assessment
guidelines. Rather, when in doubt, they adhere to the expense guidelines of the hidden resource, which
typically brings about momentary increase charge treatment.

Conclusion 13.7 CONCLUSION

 A pooled investment security called an exchange-traded fund (ETF) functions very similarly to a
mutual fund.
 An ETF is referred to as a trade fund since it trades much like stocks do. As offers are traded accessible
during the trading day, the price of an ETF’s portions will fluctuate.
 Since it would be expensive for a financial backer to buy all of the companies housed in an ETF
portfolio completely, ETFs provide lower expenses.
 There are also ETFs that are well-managed, where the portfolio managers are more involved in
trading company shares and altering the asset’s property.
 Most ETFs monitor value areas or files. Some record ETFs completely replicate a list, but others
use agent examining, which errs by using futures, choice and trade contracts and the occasional
acquisition of stocks not listed in the list.
 Most monetary experts suggest that you put a piece of your portfolio in fixed-pay protections like
bonds and bond ETFs.
 Prior to putting resources into item ETFs, it’s critical to comprehend the reason why you are keen on
products in any case.
 Various elements go into deciding the average everyday exercises and occupation responsibilities
regarding an ETF portfolio director.
 The positions of ETF portfolio supervisors and shared store portfolio chiefs are regularly basically
exchangeable besides with respect to one of the significant contrasts among ETFs and common
assets.
 Shared assets and trade exchanged reserves (ETFs) share a ton practically speaking.
 Exchange Traded Funds (ETFs) are filling in prominence due to their effortlessness, savvy way to
deal with contributing and the variety they give.
 The simplicity of trading trade exchanged reserves (ETFs), alongside their low exchange costs, offer
financial backers a productive portfolio-improving device.
 Most money ETFs are as grantor trusts. This implies the benefit from the trust makes a duty
responsibility for the ETF investor, which is burdened as conventional income.
 These assets exchange wares, stocks, Treasury bonds and monetary forms. For instance, Invesco
DB Agriculture ETF (DBA) puts resources into fates agreements of the rural wares - corn, wheat,
soybeans and sugar - not the hidden items.

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 Assuming you exchange or put resources into gold, silver or platinum bullion, the taxman thinks
about it as a “collectible” for charge purposes.
 ETFs loan themselves to viable duty arranging techniques, particularly assuming you have a mix of
stocks and ETFs in your portfolio.

13.8 GLOSSARY

 Speculation: An investment with high risk of loss but with very high returns
 ETFs: Exchange Traded Funds
 Venture: A business with possibility of profit or loss
 Fates ETFs: These assets exchange wares, stocks, treasury bonds and monetary forms
 Currency: The type of money that any particular country accepted

13.9 CASE STUDY: GROWTH OF EXCHANGE TRADED FUNDS

Case Objective

This case study discusses the Growth of exchange traded funds in the capital market.

Exchange-Traded Funds (ETFs) have seen consistent asset growth since their introduction in 1993 as a
result of their widespread appeal and have developed into a viable investment option for investors. With
its origins mostly in the United States (U.S.), the rapid overtake of the European market occurred at the
start of the twenty-first century.

However, access to these funds traded on the local exchange (Euronext Lisbon) with the Portuguese Stock
Index (PSI 20) as the underlying index (i.e., the benchmark) has only been available to Portuguese
investors since late 2010. However, since that time, the market’s acceptance of these funds has been
confirmed.

By comparing the returns of ETFs with other types of investment products typically seen as alternatives
[index mutual funds and mutual equity funds (sharing the same benchmark)], this research examines
ETFs as a comparative relevant investment option for Portuguese investors. Additionally, it seeks to
analyse the ETF price efficiency and deviation persistence. To the best of our knowledge, this is the first
time a comparative analysis of the Portuguese Fund Industry will be done, including ETF sold on the local
exchange.

Our primary findings demonstrate that, despite greater tracking abilities when dealing with downside
deviations of the benchmark and a better capacity for smoothing tracking aberrations, ETF do not
always outperform index funds in duplicating the changes of the PSI 20 index.

We discover that the investigated ETF is priced at a modest average discount with evidence of deviations
persisting for at least two days when it comes to ETFs’ price efficiency and persistence. Additionally, PSI20
(ETF), BBVA PPA ndice PSI20 (Index Fund) and the equity mutual fund BPI Portugal had the lowest tracking
error results (i.e., the investment schemes with the best ability to track the PSI 20 Index).

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Questions
1. What is the objective of this case study?
(Hint: This case study discusses how investors of exchange traded funds react to different market
situation.)
2. When were ETFs originally developed?
(Hint: ETFs were originally developed in 1993.)

13.10 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Explain ETFs.
2. Explain equity fun
3. Describe fixed income funds.
4. Define venture management.

13.11 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. A pooled investment security called an exchange-traded fund (ETF) functions very similarly to a
mutual fund. Refer to Section Introduction
2. Most ETFs monitor value areas or files. Some record ETFs completely replicate a list, but others
use agent examining, which errs by using futures, choice and trade contracts and the occasional
acquisition of stocks not listed in the list. Refer to Section Types of ETFs
3. Most monetary experts suggest that you put a piece of your portfolio in fixed-pay protections like
bonds and bond ETFs. Refer to Section Types of ETFs
4. The essential work liability of an ETF portfolio supervisor is dealing with portfolio speculations. The
portfolio director is at last liable for settling on the choices on speculations to remember for the
asset’s portfolio. Refer to Section ETF Managers

@ 13.12 POST-UNIT READING MATERIAL

 https://www.investopedia.com/terms/e/etf.asp#:~:text=An%20exchange%2Dtraded%20fund%20
(ETF)%20is%20a%20type%20of,that%20a%20regular%20stock%20can.
 https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-

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JGI JAIN
DEEMED-TO-BE UNI VE RSI TY
Financial Markets and Instruments
funds-and-exchange-traded-2

13.13 TOPICS FOR DISCUSSION FORUMS

 Discuss with your friends about the emerging role of ETF managers, how these managers help
investors in choosing a better security?

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