Instant diversification and exposure to a portfolio of securities in a single trade
Regular portfolio rebalancing aligns the fund with its underlying index and enables cost-efficient trading
Daily book value price transparency
Portfolio management done by capital market professionals
An Exchange Traded Fund or ETF is an open-end investment company that trades its shares in the stock exchange. An ETF company issues its shares in blocks called “Creation Units” in exchange for a basket of securities comprising the index it wishes to track. Creation is normally done by institutional investors, who break down the block into smaller portions and sell to retail investors in the Exchange.
ETFs have become one of the fastest growing investments in the world because they are simple to understand and provide opportunities for investors to create a diversified portfolio of stock with lower investment costs. Various funds have also set up ETFs because they are simpler to administer and have lower expense requirements compared to mutual funds or unit investment trust funds.
ETFs have what is called an underlying index, which it benchmarks against. Index is an indicator to measure or monitor the performance of a group of securities. For the PSE, its main index is the PSEi, which is composed of 30 of the largest and most liquid stocks.
In the case of the PSEi as seen in the graph, if ETFs were available at the start of 2009, the likely 4-year return of the ETF investment would have been 194.4% for a compounded annual growth rate of 31.0%.
There are 3 prices to look out for in ETFs: net asset value per share (NAVPS), iNAV and the trading price. NAVPS is the price per share of an ETF based on its book value, which is calculated every end of business day. This can be seen, along with the NAV and tracking error of the ETF, in the daily disclosure report of the company. iNAV is a more realtime calculation of the price per share of the ETF stock based on book value. The iNAV calculation is being refreshed by the minute based on the latest trading prices of the stocks included in its portfolio. Lastly, an ETF’s trading price is based on the prices of the bid, ask and done trades in the secondary market.
Publication of NAV /
iNAV every minute and NAV at end-of-day
NAV at end-of-day
NAV at end-of-day
Can be both
Fees / Costs Involved fees
Similar to trading a stock – brokers commission, transaction fees, etc.
*no sales load, no preterm fees
Front end load, back end load, redemption fee (if held less than the minimum time required)
Early redemption fee
Lower management fees
Higher management fees
Higher trustee fee
Securities and/or Cash
Just like ordinary stocks ETFs can be bought in the stock market through brokers. In addition, large retail or institutional Iinvestors that can supply the minimum number of underlying shares or basket of securities required to form a Creation Unit, can exchange such shares for ETF shares through a trading participant (brokers) authorized upon instruction by the ETF Company. This process is called “creation”. These investors will eventually break down the block of ETF shares into smaller portions and sell through the Exchange, Other all investors may now buy and sell through its trading participants (broker), just like any other stock.
The Indicative Net Asset Value, or iNAV, is an indication of the current net value of the ETF shares” underlying securities and given on a per share basis. The iNAV is provided on a per minute basis during trading hours so as to timely guide investors on the movements of the ETF price vis-à-vis its underlying securities.
These two figures, the ETF share market price and the iNAV, give investors opportunities to arbitrage. Arbitrage is the almost simultaneous purchase and sale of similar or identical assets in order to profit from a difference in prices.
An ETF”s Net Asset Value (NAV) is calculated and available at the end of trading day and gives a view on the size and performance of the fund. Creation and redemption of ETF shares are based on NAV.
ETF processes involving creation and redemption of shares can occur any time during trading hours. In the creation, the trading participant authorized by the ETF Company, called the Authorized Participant, surrenders the underlying shares to ETF Company and in return, the ETF Company gives equivalent ETF shares in Creation Units to Authorized Participant. In general, Creation is undertaken when the relative value of the underlying shares (as evidenced by the iNAV) is cheaper than the ETF shares. Thus, participants can buy relatively lower priced underlying shares and exchange them for ETF shares which may be trading at a premium.