Book contents
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- Part–III Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- 15 Other Derivatives
- 16 Exchange Traded Funds and Structured Products
- Part–VI Accounting, Taxation and Regulatory Framework
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
16 - Exchange Traded Funds and Structured Products
from Part–V - Other Derivatives and Derivative-like Instruments
Published online by Cambridge University Press: 02 August 2019
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- Part–III Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- 15 Other Derivatives
- 16 Exchange Traded Funds and Structured Products
- Part–VI Accounting, Taxation and Regulatory Framework
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
Summary
This chapter examines exchange traded funds (ETFs) and ‘structured products’. Some, but not all, ETFs and structured products are effectively derivatives.
Exchange traded funds
ETFs are investment funds that can be bought or sold on an exchange like a share. They may be of two types:
• ‘Index mutual funds’ or ‘Cash ETFs’ whose composition and performance matches a specified equity or other price index; such funds may hold the actual underlying asset in the same proportion as the index. For example, an ETF mirroring the Nifty index might hold the shares comprised in the Nifty in exactly those proportions; a gold ETF will hold gold. Cash ETFs may be geared up by borrowing.
• Synthetic funds whose performance matches a specified underlying without actual ownership of the underlying.
ETFs usually trade close to, but not exactly at, their Net Asset Value (NAV) although depending on demand and supply they can trade at significant premia/ discounts. The NAV is the value of the assets owned by the fund but the shares of the fund may trade at values higher or lower than that underlying value. To the extent the fund actually owns income-earning assets; ETFs may have a yield through dividends.
Most ETFs have an annualised expense ratio – ranging from 0.1 per cent of the price or NAV to around 2 per cent, depending on the liquidity, quantity of assets under management and strategy. (A strategy requiring more frequent trading or ‘rolling over’ of underlying assets will require higher costs than one involving passive holding of a fixed set of assets.) In this respect, the cost of holding the index fund is different from an actual holding of the underlying.
As with company shares, unless there is an Initial Public Offering (IPO) or Follow-on Public Offering (FPO), most trading takes place in the secondary market. Only some dealers buy ETF units in large blocks called ‘creation units’ directly from the ETF distributor.
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- Information
- Derivatives , pp. 241 - 254Publisher: Cambridge University PressPrint publication year: 2017