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Chapter 4
Exchange-Traded Fund
ETF stands for Exchange-Traded Fund. An ETF trades like a stock on a stock exchange and looks like mutual fund. Now, we could spilt ETF into three parts, as following figure, to introduce it.
First, one part is index because its performance tracks an underlying index, which
Figure 4.1: the structure of ETF.
the ETF is designed to replicate. Another is stock-like. ETF has a unique trading architecture design such that it can trade on Stock Exchange Market like stock. The remaining part is fund part because ETF has a lot of places like mutual fund. ETF is delivered by Taiwan Stock Exchange Corporation. It also like a mutual fund, because it also has a prospectus. An ETF delivers a formal legal document to the retail purchaser or provides investors with a document, which summarizes key information about the ETF.
In conclusion, ETFs are designed to track specific market indexes, they combine the broad diversification of a mutual fund with the trading flexibility of a stock. Actually,
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ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange (primarity the Taiwan Stock Exchange Corporation).
Figure 4.2: ETF illustration : Taiwan50 as an example.
4.1 Exchange Traded Funds
1. The big difference with ETF and mutual fund:
The big difference between them is the way of trading. Investor are only selling and buying fund with fund company and you could not sell umber units of on-hand fund for other investors. Because ETFs are listed in stock market, you could sell and buy ETF with whom is willing to.
Their trading mode are different, therefore fund only has a final price at one day and it is actually the net closing price in that day. ETFs are trading at market price and you can trade in opening time.
2. Investment in ETF:
ETF is listed trading on stock market, so the way how invest in ETF is to trade ETFs by their securities trading accounts with a brokerage house. The NAV of the fund is calculated and will be disclosed by the TSEC in every 15 seconds during the trading hours, exactly the same frequency as the updates on the Index. In Taiwan, you can open an account in taiwan securities firm and then you could buy all Taiwan
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The amount is affected by two main factor, one is the lowest number of shares that you can buy or sell in the stock market, and the other is a unit price os ETF. The lowest number is different according to local conditions. For instance, trading unit is a lot which is 1000 shares in Taiwan stock market, so you buy a 1000 share at least. Supposed that one ETF price is 50$, then you need at least 50,000$ to invest the ETF. But in America, minimal trading unit is a share so you only need ETF price to buy the ETF.
4.2 Advantage of ETF
1. Easy of Trading
The trading of ETF is same as stocks so in the stock trading hours, investors can order at any time through the securities broker.
2. Fees and Commission
ETFs charge are lower than most comparable index mutual funds, because unlike mutual funds, ETFs do not need require the support of a research team for each individual stock. ETFs are passive Investing so managers only passively adjust the constituents in the portfolio by tracking and monitoring the pulse of the market.
3. Tax Efficiency
In transaction tax, ETFs is only 1 percentage and it is lower than stock trading and mutual fund.
4. Diversification
ETF is comprised of a basket of securities, so it could been tiny affected by down of individual stocks. Therefore we can see it as trend and reduce investment risk.
5. Completing Portfolio
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Figure 4.3: ETF illustration : Taiwan50 as an example.
ETFs are designed to tracking index and the information of the constituent stocks of the Benchmark Index, performance comparison between the Benchmark Index and other important data and information may be downloaded from TSEC and fund house websites. In open market, ETF can update its latest net value every fifteen seconds in trading time, so investors can grasp the change of ETF price at any time and trade in close to the net value of the fund.
4.3 Example of ETF
The first ETF was the S&P 500 index fund, which began trading on the American Stock Exchange (AMEX) in 1993. Today there are many types of ETF like sector-specific, country-specific and broad-market indexes and hundreds of them are trading in open market. Most ETFs are passively managed, meaning investors could save big on management fees. Below we will introduce some popular ETFs:
1. Nasdaq-100 Index Tracking Stock (Nasdaq: QQQ)
This ETF represents the Nasdaq-100 Index, which consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq. The QQQ is a great ETF for who want to invest in future of the technology industry, because it can avoid risk that investing in individual stocks. The diversification which it offers can be a huge advantage when there’s volatility in the markets.
2. SPDRs
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SPDR is a family of exchange-traded funds (ETFs) traded in the United States, Europe, and Asia-Pacific and managed by State Street Global Advisors (SSGA). It is designed to track the S&P 500 stock market index and give you ownership in the index. This is good because it saves trouble and expenses involved in trying to buy all 500 stocks in the S&P 500.
3. iShares
iShares are a family of exchange-traded funds (ETFs) managed by BlackRock. Each iShares ETF also tracks a stock market index on many of the major indexes around the world including the Nasdaq, NYSE, Dow Jones, and Standard & Poor’s. In the U.S, iShares is the largest issuer of ETFs and trade on the major exchanges.
4. Taiwan50
The full name of Taiwan50 is Yuanta Taiwan Top 50 ETF, and its code is 0050.
As the name implies, it is ETF tracking index on the top 50 largest and most representative stocks in Taiwan. The ETF is just a basket of stock and it is to diversify risk. The detail list of company in Taiwan could be found in TWSE.