Exchange-traded fund

An exchange-traded fund (ETF ) (English " exchange traded fund " ) is an investment fund that is traded on the exchange. ETFs are usually passively managed and acquired in the normal case, not the issuing investment company, but on the stock exchange in the secondary market and sold.

• 3.1 asset classes
• 3.2 indices
• 3.3 Type of index replication and swap-based ETF

History

Originally, the only index funds listed on stock exchanges funds, so that both the names were considered synonyms. Meanwhile, however, many actively managed funds are also traded on exchanges.

The idea to write down funds on the stock exchange and replicate indices, came around 1970 in the U.S.. The first fund, Standard & Poor's Depositary Receipt ( SPDR abbreviation, colloquially called Spider ), was brought by the Asset Management State Street Global Advisors on the market and is the market capitalization of 90 billion U.S. dollars, the largest ETF. He was followed by the based on the Dow Jones Industrial Average and the Diamonds on the NASDAQ -100 based Cubes ( QQQ ).

Properties

ETF shares can represent as well as normal Mutual Fund Shares, a fractional ownership in a fund that is managed separately from the assets of the issuing investment company.

The investment strategy of ETFs is passive rule, ie the fund manager does not invest the Fund's assets on the basis of their own opinions, but attempts to replicate the performance of a pre- defined benchmark in the form of a financial indices (see Index Investing ). There are also actively managed ETFs, but these have a very small market share. Here, also the definition to strategy indices is not clear.

Additional, independent of the performance of the benchmark income can achieve the Fund's management by giving the Fund's securities to other capital market participants and thus generates lending fees.

ETFs may at any time, such as shares are traded on the stock exchange. From normal mutual funds, which are also partly traded to ETF differ in the following points:

• Investors buy and sell ETF normally only on the stock market, an acquisition over the issuing investment company is not provided.
• The composition of the Fund will be published once a day.
• While regular mutual funds only once a day, the net asset value net asset value ( NAV) of the fund will be released, determined and published, the issuer of the ETF during the trading day continuously an indicative net asset value ( iNAV ).
• For the creation of new ETF shares, there is a separate process, the so-called creation / redemption process.

The price of ETFs forms on the Stock Exchange by supply and demand, but, for arbitrage reasons, usually close to the net asset value of the fund. In order to guarantee a liquid market, ETFs are managed by market makers that provide constantly buying and selling rates.

In contrast, non-exchange- traded funds can be bought and sold through the fund company. The fund company is only once a day fixed a price.

ETFs are to be distinguished from the similarly-named Exchange Traded Notes ( ETNs ) and Exchange Traded Commodities (ETCs ). These are not shares in an investment fund, but to specific types of debt securities similar to the Certificates.

Costs

Investors contribute ETFs the following costs:

• Costs, which are summarized in the Total Expense Ratio (TER), such as management fees, index fees and other costs, such as brochures.
• Transaction costs of the Fund
• The usual fees for exchange trading (Order commission, brokerage fees, settlement fees, bid-ask spread)

The costs incurred will be - as usual for investment funds - from the fund.

The annual management costs are typically between 0% and 1 %.

ETFs that track a passive investment strategy, possibly falling to lower transaction costs and the costs of active fund management accounts.

Since ETFs are not purchased through the investment company, eliminating the often to be paid initial fee.

Creation / redemption process

The issue of new ETF shares via an own process to such security, the so-called Creation Process. Return ETF shares on the so-called redemption process to the issuing investment company analog.

The Creation Process ETF shares are created in blocks of typically 50,000. The market maker provides cash or a basket of securities in the value of the to be created ETF shares to the investment company. This in turn provides the shares that the market maker can now sell on the stock market to investors.

A special feature is the ability to deliver a basket of securities. This corresponds to the simplest case in its composition of the relevant ETF strategy. For example, the market maker may, in the case of an ETF, which will track the STOXX Europe 50 index, provide a securities portfolio that contains the stocks included in the index according to their index weights. This practice is called "creation in kind" (roughly: the creation in the same way " ) refers. Will the new securities paid with money, it is called a "cash creation" (English, about " creating over cash ").

Conversely, the Market Maker ETF shares to the issuing investment company return, eg if it has a corresponding number purchased on the secondary market. He obtained analogously to the Creation process cash or a basket of securities back. Analogous to the Creation process is referred to as "redemption in kind" and "cash redemption".

Institutional investors who wish to buy or sell large volumes, it can also do over the counter directly from the investment company on the Creation and redemption process. Returns or the investor when buying or selling a basket of securities, this may have tax advantages for him.

Typing of ETF

ETFs can be characterized by different criteria. These include the asset class, while the replicated index and the type of index replication.

Asset classes

ETFs are available across multiple asset classes, primarily stocks, bonds, refer to the money market, alternative investments, currencies, commodities and real estate.

Indices

The first ETFs based on broad market equity indices. Over time, broadened the offer, in addition to other asset classes, ETFs were offered to more and also drawing on more specialized indices. You can basically make the following distinction:

• ETFs on broad market indices ( such as the STOXX Europe 50 or iBoxx )
• ETFs based on industry indices (eg, the sectoral sub-indices of the known stock indices)
• ETFs on region indices, ie indices that relate to economic regions ( including ETFs on emerging markets)
• ETFs on so-called strategy indices

By " strategy index " is referred to a variety of highly specialized yet very different, usually equity-based indices. The differentiation from other index types is not always clear. These may include:

• Indices which refer to highly specialized industries (eg renewable energies such as ÖkoDAX )
• Indices whose composition and weightings according fundamentals (eg FTSE RAFI indices or those that try to select value stocks or growth stocks ) or the dividend yield (eg DivDAX ) determine
• Indices that track specific trading strategies. These include in particular indices, the short positions, leveraged positions and option strategies replicate.

Type of index replication and swap-based ETF

To map with an ETF, the performance of the underlying index, there are several techniques:

• With full replication (Full Replication method), all components of the index in the corresponding weighting be held in the fund.
• In the sampling method, only a subset of the index constituents is bought into the fund. Usually there will be also the values ​​that have the largest weight in the index and have the greatest liquidity.
• In the synthetic index replication swaps are used by the Fund to reflect the performance of the Index.

With full replication can be a good simulation of the performance of the Index will be achieved (low tracking error). The method finds its limits in indices that contain very many constituents (single values ​​) (see above includes the well-known S & P 500-stock index of 500 values ​​). A large number of individual stocks in index replication leads to higher transaction costs. In addition, tend to be found at many constituents more illiquid, which makes it difficult to replicate and can also make more expensive. Ultimately, the index weights of the individual values ​​correspond rarely whole numbers of securities, a problem that increases with performance indices in terms of showing up on the reinvestment of income. In addition, the full replication can not be applied if the ETF underlying index contains values ​​that are not freely tradable.

Since for large indices, which are not equally weighted, some values ​​have a low weight and therefore little influence on the index performance, you can work around these problems with the sampling method. In this case, however, the tracking error increases tend to increase.

The synthetic index replication is a recent development. It enables or simplifies it to invest via ETFs in very illiquid or not freely tradable. In this method of replication are located in the Fund securities which may contain no or only a slight connection to the replicated index. In addition, there are swap transactions (equity swaps, total return swaps) in the fund with which the performance of the securities will be exchanged into the desired index.

With the synthetic index replication a lower tracking error can be achieved. In addition, both tax benefits and technical advantages in terms can be achieved in the conduct of business with swaps in the fund if necessary.

Risks

A purchaser of ETF shares is primarily exposed to the results from the price fluctuations of the ETF market price risks. ETFs on broad market indices, these are mainly non-specific or general market risk (market risk within the meaning of the Capital Asset Pricing Model), as broad market indices are highly diversified. In specialized ETFs special or specific market risks are added (eg country risks, industry risks ).

The asset class of the ETF determines what type of market risk mainly comes into play ( equity risk, interest rate risk, etc.). With an investment of the ETF bonds in default risk (credit risk ) is added to the obligor in the fund.

Compared with the issuer of the ETF shares, so the investment company, there is no default risk because of the construction of a special fund.

In swapbasierten ETF over the business partners with whom the Fund completes the swap, a counterparty risk in the form of counterparty risk. Under the terms of the EU regulation ( UCITS Directive ), the value of derivative transactions may not exceed 10 % of the net asset value of a fund so that the counterparty risk is limited to this amount. Through a collateral for the swap agreements, the counterparty risk can be further reduced. In fact, in the majority of the provider, the average risk swap not more than 2 %.

In addition, more recently, the systemic risks are emphasized, for example, accrue that distinguish the securities in the fund from which the index and thereby a panic selling in a market segment can be transferred to other segments.

In addition, counterparty risks arise when securities are lent by the Fund. Securities lending transactions are carried out generally collateralized. Therefore, the risk of securities lending is essentially to that on the failure of the borrower, the value of the collateral received is insufficient, recover the loaned securities on the market.

Providing a liquid market is the responsibility of the Market Maker. This limits market liquidity risk.

For various reasons, the performance of the ETF may differ from the performance of the underlying index. This tracking error is a risk not to participate in the desired performance for the investor. This includes conversely the chance to get a better performance than that of the index.

Products and trading opportunities

The derivatives exchange Eurex offers futures and options on a number of different ETF issuers. The underlying ETF are largely based on broad market equity indices. The contracts have, in comparison to the usual exchange-traded futures contract volume at a low ( 1 contract typically refers to 100 shares ), to make them more suitable for private investors.

With ETFs, securities lending and short sales are possible.

This results in ETFs based on liquid indices basically numerous arbitrage opportunities: On the one hand between the spot market and the stock exchange futures market for ETF shares themselves, on the other hand the underlying between these markets and the ETF markets ( stock market, bond market, etc. ), and finally between the ETF markets and the futures markets for the underlying products ( ie for example between equity index ETF and the related ETF derivatives on the one hand and stock index futures and stock index futures options on the other).

Since 2007, funds of funds that invest solely in ETFs ( ETF funds of funds). Further savings plans on ETF are offered.

Use of ETF

Here ETFs are used by both private investors and institutional investors. The latter use ETFs, among other things, reflect the passive part of their investment strategies. 2008, the share of investments, institutional investors had passively invested in ETFs, at about 3%. In addition, ETFs are used for liquidity management. Due to their comparatively low fees and good tradability they are, zwischenzuparken cash in the short term.