Thursday, 11 October 2012

Objective: Long Term investment in China with superior returns

Investment Advisory Team:

Jim Rogers
     http://www.jimrogers.com/
Li Ka-Shing
     http://www.ckh.com.hk/eng/
     http://www.hutchison-whampoa.com/en/global/home.php
Marc Faber
     http://new.gloomboomdoom.com/portalgbd/homegbd.cfm
George Soros
     http://georgesoros.com/
Warren Buffett
     http://www.berkshirehathaway.com/

Investing Style: Invest in China using mainly China focus ETF funds and some high liquidity ADRs
according to the recommendations of the Investment Advisory Team and incorporating the Austrian Business Cycle Theory (non-mainstream economic theories).

FAQ:

What is ABCT ?

Austrian business cycle theory

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Part of a series on the
Austrian School
The Austrian business cycle theory (or ABCT) attempts to explain business cycles through a set of ideas held by the Austrian School of economics. The theory views business cycles as the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.[1] The creator of the Austrian business cycle theory was Austrian School economist and Nobel laureate Friedrich Hayek. Hayek won a Nobel Prize in economics in 1974 (shared with Gunnar Myrdal) in part for his work on this theory.[2][3]
Proponents believe that a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment.[4] According to the theory, the business cycle unfolds in the following way: Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. It is argued that this leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. Proponents hold that a credit-sourced boom results in widespread malinvestments. In the theory, a correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when exponential credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back towards more efficient uses.
The Austrian explanation of the business cycle differs significantly from the mainstream understanding of business cycles and is generally rejected by mainstream economists. In contrast to most mainstream theories on business cycles, Austrians focus on the credit cycle as the primary cause of most business cycles. Economists Milton Friedman,[5][6] Gordon Tullock,[7] Bryan Caplan,[8] and Paul Krugman[9] have written about why they regard the theory as incorrect.
According to Austrian economist Murray Rothbard, the Austrian business cycle theory attempts to answer the following questions about things which Austrians believe appear over the course of a business cycle:[10]
  • Why is there a sudden general cluster of business errors?
  • Why do capital goods industries and asset market prices fluctuate more widely than do the consumer goods industries and consumer prices?
  • Why is there a general increase in the quantity of money in the economy during every boom, and why is there generally, though not universally, a fall in the money supply during the depression (or a sharp contraction in the growth of credit in a recession)?
Rothbard also argues that a feature of the theory is how it integrates "macro" with "mico" economics, being a theory in harmony with general economic theory and other Austrian theories regarding price coordination and capital structure.[11]

http://en.wikipedia.org/wiki/Austrian_business_cycle_theory



What is ETF ?

Exchange-traded fund

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An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks.[1] An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.[2][3] ETFs are the most popular type of exchange-traded product.[citation needed]
Only so-called authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from or to the fund manager, and then only in creation units, which are large blocks of tens of thousands of ETF shares, usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares for the long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates to the net asset value of the underlying assets.[4] Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market.
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be "ETFs", even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively managed ETFs.[4]

Contents

Structure

ETFs offer public investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a securities exchange through a broker-dealer. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value, or NAV. Instead, financial institutions purchase and redeem ETF shares directly from the ETF, but only in large blocks, varying in size by ETF from 25,000 to 200,000 shares, called "creation units". Purchases and redemptions of the creation units generally are in kind, with the institutional investor contributing or receiving a basket of securities of the same type and proportion held by the ETF, although some ETFs may require or permit a purchasing or redeeming shareholder to substitute cash for some or all of the securities in the basket of assets.[4]
The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. Existing ETFs have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they wish to purchase a creation unit, and the exchange disseminates the updated net asset value of the shares throughout the trading day, typically at 15-second intervals.[4]
If there is strong investor demand for an ETF, its share price will (temporarily) rise above its net asset value per share, giving arbitrageurs an incentive to purchase additional creation units from the ETF and sell the component ETF shares in the open market. The additional supply of ETF shares reduces the market price per share, generally eliminating the premium over net asset value. A similar process applies when there is weak demand for an ETF and its shares trade at a discount from net asset value.
In the United States, most ETFs are structured as open-end management investment companies (the same structure used by mutual funds and money market funds), although a few ETFs, including some of the largest ones, are structured as unit investment trusts. ETFs structured as open-end funds have greater flexibility in constructing a portfolio and are not prohibited from participating in securities lending programs or from using futures and options in achieving their investment objectives.[5]
Under existing regulations, a new ETF must receive an order from the Securities and Exchange Commission, or SEC, giving it relief from provisions of the Investment Company Act of 1940 that would not otherwise allow the ETF structure. In 2008, however, the SEC proposed rules that would allow the creation of ETFs without the need for exemptive orders. Under the SEC proposal, an ETF would be defined as a registered open-end management investment company that:
  • Issues (or redeems) creation units in exchange for the deposit (or delivery) of basket assets the current value of which is disseminated per share by a national securities exchange at regular intervals during the trading day;
  • Identifies itself as an ETF in any sales literature;
  • Issues shares that are approved for listing and trading on a securities exchange;
  • Discloses each business day on its publicly available web site the prior business day's net asset value and closing market price of the fund's shares, and the premium or discount of the closing market price against the net asset value of the fund's shares as a percentage of net asset value; and
  • Either is an index fund, or discloses each business day on its publicly available web site the identities and weighting of the component securities and other assets held by the fund.[4]
The SEC rule proposal would allow ETFs either to be index funds or to be fully transparent actively managed funds. Historically, all ETFs in the United States have been index funds. In 2008, however, the SEC began issuing exemptive orders to fully transparent actively managed ETFs. The first such order was to PowerShares Actively Managed Exchange-Traded Fund Trust,[6] and the first actively managed ETF in the United States was the Bear Stearns Current Yield Fund, a short-term income fund that began trading on the American Stock Exchange under the symbol YYY on 25 March 2008.[7] The SEC rule proposal indicates that the SEC may still consider future applications for exemptive orders for actively managed ETFs that do not satisfy the proposed rule's transparency requirements.[4]
Some ETFs invest primarily in commodities or commodity-based instruments, such as crude oil and precious metals. Although these commodity ETFs are similar in practice to ETFs that invest in securities, they are not "investment companies" under the Investment Company Act of 1940.[4]
Publicly traded grantor trusts, such as Merrill Lynch's HOLDRs securities, are sometimes considered to be ETFs, although they lack many of the characteristics of other ETFs. Investors in a grantor trust have a direct interest in the underlying basket of securities, which does not change except to reflect corporate actions such as stock splits and mergers. Funds of this type are not "investment companies" under the Investment Company Act of 1940.[8]
As of 2009, there were approximately 1,500 exchange-traded funds traded on US exchanges.[9] This count uses the wider definition of ETF, including HOLDRs and closed-end funds.

History

ETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in stopping sales in the United States.[10]
A similar product, Toronto Index Participation Shares, started trading on the Toronto Stock Exchange in 1990. The shares, which tracked the TSE 35 and later the TSE 100 stocks, proved to be popular. The popularity of these products led the American Stock Exchange to try to develop something that would satisfy SEC regulation in the United States.[10]
Nathan Most and Steven Bloom, executives with the exchange, designed and developed Standard & Poor's Depositary Receipts (NYSE: SPY), which were introduced in January 1993.[11][12] Known as SPDRs or "Spiders", the fund became the largest ETF in the world. In May 1995 they introduced the MidCap SPDRs (NYSE: MDY).
Barclays Global Investors, a subsidiary of Barclays plc, entered the fray in 1996 with World Equity Benchmark Shares, or WEBS, subsequently renamed iShares MSCI Index Fund Shares. WEBS tracked MSCI country indices, originally 17, of the funds' index provider, Morgan Stanley. WEBS were particularly innovative because they gave casual investors easy access to foreign markets. While SPDRs were organized as unit investment trusts, WEBS were set up as a mutual fund, the first of their kind.[13][14]
In 1998, State Street Global Advisors introduced the "Sector Spiders", which follow the nine sectors of the S&P 500.[15] Also in 1998, the "Dow Diamonds" (NYSE: DIA) were introduced, tracking the famous Dow Jones Industrial Average. In 1999, the influential "cubes" (NASDAQ: QQQQ) were launched attempting to replicate the movement of the NASDAQ-100.
In 2000 Barclays Global Investors put a significant effort behind the ETF marketplace, with a strong emphasis on education and distribution to reach long-term investors. The iShares line was launched in early 2000. Within 5 years iShares had surpassed the assets of any other ETF competitor in the U.S. and Europe. Barclays Global Investors was sold to BlackRock in 2009. The Vanguard Group entered the market in 2001.
Since then ETFs have proliferated, tailored to an increasingly specific array of regions, sectors, commodities, bonds, futures, and other asset classes. As of September 2010, there were 916 ETFs in the U.S., with $882 billion in assets, an increase of $189 billion over the previous twelve months.[16]

Investment uses

ETFs generally provide the easy diversification, low expense ratios, and tax efficiency of index funds, while still maintaining all the features of ordinary stock, such as limit orders, short selling, and options. Because ETFs can be economically acquired, held, and disposed of, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to implement market timing investment strategies.[5] Among the advantages of ETFs are the following:[8][17]
  • Lower costs – ETFs generally have lower costs than other investment products because most ETFs are not actively managed and because ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. ETFs typically have lower marketing, distribution and accounting expenses, and most ETFs do not have 12b-1 fees.
  • Buying and selling flexibility – ETFs can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day. As publicly traded securities, their shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.
  • Tax efficiency – ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.
  • Market exposure and diversification – ETFs provide an economical way to rebalance portfolio allocations and to "equitize" cash by investing it quickly. An index ETF inherently provides diversification across an entire index. ETFs offer exposure to a diverse variety of markets, including broad-based indices, broad-based international and country-specific indices, industry sector-specific indices, bond indices, and commodities.
  • Transparency – ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.
Some of these advantages derive from the status of most ETFs as index funds.

Types

For more details on this topic, see List of American exchange-traded funds.

Index ETFs

Most ETFs are index funds that attempt to replicate the performance of a specific index. Indexes may be based on stocks, bonds, commodities, or currencies. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.[5] As of June 2012, in the United States, about 1200 index ETFs exist, with about 50 actively managed ETFs. Index ETF assets are about $1200 billion, compared with about $7 billion for actively managed ETFs.[18] Some index ETFs, known as leveraged ETFs or inverse ETFs, use investments in derivatives to seek a return that corresponds to a multiple of, or the inverse (opposite) of, the daily performance of the index.[19]
Some index ETFs invest 100% of their assets proportionately in the securities underlying an index, a manner of investing called "replication". Other index ETFs use "representative sampling", investing 80% to 95% of their assets in the securities of an underlying index and investing the remaining 5% to 20% of their assets in other holdings, such as futures, option and swap contracts, and securities not in the underlying index, that the fund's adviser believes will help the ETF to achieve its investment objective. For index ETFs that invest in indices with thousands of underlying securities, some index ETFs employ "aggressive sampling" and invest in only a tiny percentage of the underlying securities.[20][21]

Stock ETFs

The first and most popular ETFs track stocks. Many funds track national indexes; for example, Vanguard Total Stock Market ETF NYSE: VTI tracks the MSCI US Broad Market Index, and several funds track the S&P 500, both indexes for US stocks. Other funds own stocks from many countries; for example, Vanguard Total International Stock Index NASDAQ: VXUS tracks the MSCI All Country World ex USA Investable Market Index, while the iShares MSCI EAFE Index NYSE: EFA tracks the MSCI EAFE Index, both "world ex-US" indexes.

Bond ETFs

Exchange-traded funds that invest in bonds are known as bond ETFs. They thrive during economic recessions because investors pull their money out of the stock market and into bonds (for example, government treasury bonds or those issues by companies regarded as financially stable). Because of this cause and effect relationship, the performance of bond ETFs may be indicative of broader economic conditions.[22] There are several advantages to bond ETFs such as the reasonable trading commissions, but this benefit can be negatively offset by fees if bought and sold through a third party.[23]

Commodity ETFs or ETCs

Commodity ETFs (ETCs or CETFs) invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries. The idea of a Gold ETF was first officially conceptualised by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002.[24] The first gold exchange-traded fund was Gold Bullion Securities launched on the ASX in 2003, and the first silver exchange-traded fund was iShares Silver Trust launched on the NYSE in 2006. As of November 2010 a commodity ETF, namely SPDR Gold Shares, was the second-largest ETF by market capitalization.[25]
However, generally commodity ETFs are index funds tracking non-security indices. Because they do not invest in securities, commodity ETFs are not regulated as investment companies under the Investment Company Act of 1940 in the United States, although their public offering is subject to SEC review and they need an SEC no-action letter under the Securities Exchange Act of 1934. They may, however, be subject to regulation by the Commodity Futures Trading Commission.[26][27]
Exchange-traded commodities (ETCs) are investment vehicles (asset backed bonds, fully collateralised) that track the performance of an underlying commodity index including total return indices based on a single commodity. Similar to ETFs and traded and settled exactly like normal shares on their own dedicated segment, ETCs have market maker support with guaranteed liquidity, enabling investors to gain exposure to commodities, on-exchange, during market hours.
The earliest commodity ETFs (e.g., GLD and SLV) actually owned the physical commodity (e.g., gold and silver bars). Similar to these are NYSE: PALL (palladium) and NYSE: PPLT (platinum). However, most ETCs implement a futures trading strategy, which may produce quite different results from owning the commodity.
Commodity ETFs trade just like shares, are simple and efficient and provide exposure to an ever-increasing range of commodities and commodity indices, including energy, metals, softs and agriculture. However, it is important for an investor to realize that there are often other factors that affect the price of a commodity ETF that might not be immediately apparent. For example, buyers of an oil ETF such as USO might think that as long as oil goes up, they will profit roughly linearly. What isn't clear to the novice investor is the method by which these funds gain exposure to their underlying commodities. In the case of many commodity funds, they simply roll so-called front-month futures contracts from month to month. This does give exposure to the commodity, but subjects the investor to risks involved in different prices along the term structure, such as a high cost to roll.[28][29]

Currency ETFs or ETCs

In 2005, Rydex Investments launched the first ever currency ETF called the Euro Currency Trust (NYSE: FXE) in New York. Since then Rydex has launched a series of funds tracking all major currencies under their brand CurrencyShares. In 2007 Deutsche Bank's db x-trackers launched EONIA Total Return Index ETF in Frankfurt tracking the euro, and later in 2008 the Sterling Money Market ETF (LSE: XGBP) and US Dollar Money Market ETF (LSE: XUSD) in London. In 2009, ETF Securities launched the world's largest FX platform tracking the MSFXSM Index covering 18 long or short USD ETC vs. single G10 currencies. The funds are total return products where the investor gets access to the FX spot change, local institutional interest rates and a collateral yield.

Actively managed ETFs

Actively managed ETFs (AMETFs) are quite recent in the United States. The first one was offered in March 2008 but was liquidated in October 2008. The actively managed ETFs approved to date are fully transparent, publishing their current securities portfolios on their web sites daily. However, the SEC has indicated that it is willing to consider allowing actively managed ETFs that are not fully transparent in the future.[4]
The fully transparent nature of existing ETFs means that an actively managed ETF is at risk from arbitrage activities by market participants who might choose to front run its trades[citation needed]. The initial actively traded equity ETFs have addressed this problem by trading only weekly or monthly, however today, actively managed ETFs trade at the discretion of the manager and to date, there have been no instances of front running. Actively traded debt ETFs, which are less susceptible to front-running, trade their holdings more frequently.[30]
Actively managed ETFs have grown faster in their first 3 years of existence than index ETFs did in their first 3 year of existence. However, as track records develop, many see actively managed ETFs as a significant competitive threat to actively managed mutual funds. [31]

Exchange-traded grantor trusts

An exchange-traded grantor trust share represents a direct interest in a static basket of stocks selected from a particular industry. The leading example is Holding Company Depositary Receipts, or HOLDRs, a proprietary Merrill Lynch product. HOLDRs are neither index funds nor actively managed; rather, the investor has a direct interest in specific underlying stocks. While HOLDRs have some qualities in common with ETFs, including low costs, low turnover, and tax efficiency, many observers consider HOLDRs to be a separate product from ETFs.[8] [32]

Inverse ETFs

Main article: Inverse exchange-traded fund

Leveraged ETFs

Leveraged exchange-traded funds (LETFs), or simply leveraged ETFs, are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs.[33] Leveraged index ETFs are often marketed as bull or bear funds. A leveraged bull ETF fund might for example attempt to achieve daily returns that are 2x or 3x more pronounced than the Dow Jones Industrial Average or the S&P 500. A leveraged inverse (bear) ETF fund on the other hand may attempt to achieve returns that are -2x or -3x the daily index return, meaning that it will gain double or triple the loss of the market. Leveraged ETFs require the use of financial engineering techniques, including the use of equity swaps, derivatives and rebalancing, and re-indexing to achieve the desired return.[34] The most common way to construct leveraged ETFs is by trading futures contracts.
The rebalancing and re-indexing of leveraged ETFs may have considerable costs when markets are volatile.[35][36] The rebalancing problem is that the fund manager incurs trading losses because he needs to buy when the index goes up and sell when the index goes down in order to maintain a fixed leverage ratio. A 2.5% daily change in the index will for example reduce value of a -2x bear fund by about 0.18% per day, which means that about a third of the fund may be wasted in trading losses within a year (1-(1-0.18%)252=36.5%). Investors may however circumvent this problem by buying or writing futures directly, accepting a varying leverage ratio.[37] A more reasonable estimate of daily market changes is 0.5%, which leads to a 2.6% yearly loss of principal in a 3x leveraged fund.[citation needed]
The re-indexing problem of leveraged ETFs stems from the arithmetic effect of volatility of the underlying index. Take, for example, an index that begins at 100 and a 2X fund based on that index that also starts at 100. In a first trading period (e.g., a day), the index rises 10% to 110. The 2X fund will then rise 20% to 120. The index then drops back to 100 (a drop of 9.09%), so that it is now even. The drop in the 2X fund will be 18.18% (2*9.09). But 18.18% of 120 is 21.82. This puts the value of the 2X fund at 98.18. Even though the index is unchanged after two trading periods, an investor in the 2X fund would have lost 1.82%. This decline in value can be even greater for inverse funds (leveraged funds with negative multipliers such as -1, -2, or -3). It always occurs when the change in value of the underlying index changes direction. And the decay in value increases with volatility of the underlying index.

ETFs compared to mutual funds

Costs

Because ETFs trade on an exchange, each transaction is generally subject to a brokerage commission. Commissions depend on the brokerage and which plan is chosen by the customer. For example, a typical flat fee schedule from an online brokerage firm in the United States ranges from $10 to $20, but can be as low as $0 with discount brokers. Due to this commission cost, the amount invested has a great bearing; someone who wishes to invest $100 per month may have a significant percentage of their investment destroyed immediately, while for someone making a $200,000 investment, the commission cost may be negligible. Generally, mutual funds obtained directly from the fund company itself do not charge a brokerage fee. Thus when low or no-cost transactions are available, ETFs become very competitive.[38]
ETFs have a lower expense ratio than comparable mutual funds. Not only does an ETF have lower shareholder-related expenses, but because it does not have to invest cash contributions or fund cash redemptions, an ETF does not have to maintain a cash reserve for redemptions and saves on brokerage expenses.[39] Mutual funds can charge 1% to 3%, or more; index fund expense ratios are generally lower, while ETFs are almost always in the 0.1% to 1% range. Over the long term, these cost differences can compound into a noticeable difference.[40]
The cost difference is more evident when compared with mutual funds that charge a front-end or back-end load as ETFs do not have loads at all. The redemption fee and short-term trading fees are examples of other fees associated with mutual funds that do not exist with ETFs. Traders should be cautious if they plan to trade inverse and leveraged ETFs for short periods of time. Close attention should be paid to transaction costs and daily performance rates as the potential combined compound loss can sometimes go unrecognized and offset potential gains over a longer period of time.[41]

Taxation

ETFs are structured for tax efficiency and can be more attractive than mutual funds. In the U.S., whenever a mutual fund realizes a capital gain that is not balanced by a realized loss, the mutual fund must distribute the capital gains to its shareholders. This can happen whenever the mutual fund sells portfolio securities, whether to reallocate its investments or to fund shareholder redemptions. These gains are taxable to all shareholders, even those who reinvest the gains distributions in more shares of the fund. In contrast, ETFs are not redeemed by holders (instead, holders simply sell their ETF shares on the stock market, as they would a stock, or effect a non-taxable redemption of a creation unit for portfolio securities), so that investors generally only realize capital gains when they sell their own shares or when the ETF trades to reflect changes in the underlying index.[5]
In most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset classes or categories.[42] Because Vanguard's ETFs are a share-class of their mutual funds, they don't get all the tax advantages if there are net redemptions on the mutual fund shares.[43] Although they do not get all the tax advantages, they get an additional advantage from tax loss harvesting any capital losses from net redemptions.[44][45]
In the U.K., ETFs can be shielded from capital gains tax by placing them in an Individual Savings Account or self-invested personal pension, in the same manner as many other shares. Because UK-resident ETFs would be liable for UK corporation tax on non-UK dividends, most ETFs which hold non-UK companies sold to UK investors are issued in Ireland or Luxembourg.[46]

Trading

Perhaps the most important benefit of an ETF is the stock-like features offered. A mutual fund is bought or sold at the end of a day's trading, whereas ETFs can be traded whenever the market is open. Since ETFs trade on the market, investors can carry out the same types of trades that they can with a stock. For instance, investors can sell short, use a limit order, use a stop-loss order, buy on margin, and invest as much or as little money as they wish (there is no minimum investment requirement).[47] Also, many ETFs have the capability for options (puts and calls) to be written against them. Covered call strategies allow investors and traders to potentially increase their returns on their ETF purchases by collecting premiums (the proceeds of a call sale or write) on calls written against them. Mutual funds do not offer those features.[48]

Risks

Effects on stability

ETFs that buy and hold commodities or futures of commodities have become popular. For example, SPDR Gold Shares ETF (GLD) has 41 million ounces in trust. [49] The silver ETF, SLV, is also very large. The commodity ETFs are in effect consumers of their target commodities, thereby affecting the price in a spurious fashion. [50] In the words of the IMF, “Some market participants believe the growing popularity of exchange-traded funds (ETFs) may have contributed to equity price appreciation in some emerging economies, and warn that leverage embedded in ETFs could pose financial stability risks if equity prices were to decline for a protracted period.” [51]

Regulatory risk

Synthetic ETFs are attracting regulatory attention from the FSB, [52] the IMF, [53] and the BIS. [54] Areas of concern include the lack of transparency in products and increasing complexity; conflicts of interest; and lack of regulatory compliance.

Counterparty risk

A synthetic ETF has counterparty risk, because the counterparty is contractually obligated to match the return on the index. The deal is arranged with collateral posted by the swap counterparty. A potential hazard is that the investment bank offering the ETF might post its own collateral, and that collateral could be of dubious quality. Furthermore, the investment bank could use its own trading desk as counterparty. These types of set-ups are not allowed under the European guidelines, Undertakings for Collective Investment in Transferable Securities (UCITS), so the investor should look for UCITS III-compliant funds. [55]

Criticism

John C. Bogle, founder of the Vanguard Group, a leading issuer of index mutual funds (and, since Bogle's retirement, of ETFs), has argued that ETFs represent short-term speculation, that their trading expenses decrease returns to investors, and that most ETFs provide insufficient diversification. He concedes that a broadly diversified ETF that is held over time can be a good investment.[56]
ETFs are dependent on the efficacy of the arbitrage mechanism in order for their share price to track net asset value. While the average deviation between the daily closing price and the daily NAV of ETFs that track domestic indices is generally less than 2%, the deviations may be more significant for ETFs that track certain foreign indices.[5] The Wall Street Journal reported in November 2008, during a period of market turbulence, that some lightly traded ETFs frequently had deviations of 5% or more, exceeding 10% in a handful of cases, although even for these niche ETFs, the average deviation was only a little more than 1%. The trades with the greatest deviations tended to be made immediately after the market opened.[57]
According to a study on ETF returns in 2009 by Morgan Stanley, ETFs missed in 2009 their targets by an average of 1.25 percentage points, a gap more than twice as wide as the 0.52-percentage-point average they posted in 2008.[58] Part of this so-called tracking error is attributed to the proliferation of ETFs targeting exotic investments or areas where trading is less frequent, such as emerging-market stocks, future-contracts based commodity indices and junk bonds.[citation needed]
The tax advantages of ETFs are of no relevance for investors using tax-deferred accounts (or indeed, investors who are tax-exempt in the first place).[59] However, the lower expense ratios are proving difficult for the proponents of traditional mutual funds to overcome.
In a survey of investment professionals, the most frequently cited disadvantage of ETFs was the unknown, untested indices used by many ETFs, followed by the overwhelming number of choices.[3]
Some critics claim that ETFs can be, and have been, used to manipulate market prices, including having been used for short selling that has been asserted by some observers (including Jim Cramer of theStreet.com) to have contributed to the market collapse of 2008.[60][61]

Issuers of ETFs

Main article: List of exchange-traded funds

See also

References

  1. ^ "Introduction To Exchange-Traded Funds ", Investopedia,
  2. ^ State Street Global Advisors and Knowledge@Wharton, ETFs Changing the Way Advisors Do Business, According to State Street and Wharton Study, Business Wire (June 10, 2008).
  3. ^ a b The Impact of Exchange Traded Products on the Financial Advisory Industry: A Joint Study of State Street Global Advisors and Knowledge@Wharton (2008).
  4. ^ a b c d e f g h Exchange-Traded Funds, SEC Release Nos. 33-8901, IC-28193, 73 Fed. Reg. 14618 (March 11, 2008).
  5. ^ a b c d e Actively Managed Exchange-Traded Funds, SEC Release No. IC-25258, 66 Fed. Reg. 57614 (November 8, 2001).
  6. ^ PowerShares Capital Management LLC, et al.; Notice of Application, Release No. IC-28140 (February 1, 2008), 73 Fed. Reg. 7328 (February 7, 2008) (notice); PowerShares Capital Management LLC, Release No. IC-28171 (February 27, 2008) (order). The SEC issued orders to Bear Stearns Asset Management, Inc., Barclays Global Fund Advisors, and WisdomTree Trust on the same day.
  7. ^ American Stock Exchange Lists First Actively-Managed Exchange Traded Fund (March 25, 2008).
  8. ^ a b c ETFConnect, "Index ETFs – Know Your Funds" (visited April 7, 2008).
  9. ^ Peaceful Gains. "A List of exchange-traded funds". Retrieved October 23, 2009.
  10. ^ a b Gastineau, Gary (2002). The Exchange-Traded Funds Manual. John Wiley and Sons. p. 32. ISBN 978-0-471-21894-4.
  11. ^ Carrel, Lawrence (2008), ETFs for the Long Run, John Wiley & Sons, ISBN 978-0-470-13894-6
  12. ^ Jennifer Bayot (December 10, 2004). "Nathan Most Is Dead at 90; Investment Fund Innovator". New York Times. Retrieved April 23, 2008.
  13. ^ Wiandt, Jim; William McClatchy (2002). Exchange Traded Funds. John Wiley and Sons. p. 82. ISBN 0-471-22513-4.
  14. ^ Fabozzi, Frank (2003). The Handbook of Financial Instruments. John Wiley and Sons. p. 532. ISBN 0-471-22092-2.
  15. ^ Ferri, Richard A. (2008). The ETF Book, John Wiley and Sons, 191 ISBN 0-470-13063-6.
  16. ^ Investment Company Institute, Exchange-Traded Fund Assets September 2010[dead link]
  17. ^ American Stock Exchange, ETFs – Individual Investor (visited April 7, 2008).
  18. ^ [ETF Statistics For June 2012: Actively Managed Assets Less Than 1% http://etfdailynews.com/2012/07/10/etf-statistics-for-june-2012-actively-managed-assets-less-than-1/]
  19. ^ The Case Against Leveraged ETFs, Seeking Alpha (May 17, 2007).
  20. ^ "Our Take on the Bond ETF Dilemma". News.morningstar.com. Retrieved 2011-10-03.
  21. ^ Stacy L. Fuller, The Evolution of Actively Managed Exchange-Traded Funds, Review of Securities & Commodities Regulation (April 16, 2008).
  22. ^ "Indicators for Trading in Government Bond ETFs". Tradingmarkets.com. Retrieved 2011-10-03.
  23. ^ "Bond ETFs: A Viable Alternative". Investopedia.com. 2009-09-19. Retrieved 2011-10-03.
  24. ^ "Benchmark Asset Management Company conceptualises Gold ETF". Etfglobalinvestor.net. Retrieved 2011-10-03.
  25. ^ "Largest ETFs: Top 25 ETFs By Market Cap". ETFdb. Retrieved 2010-11-03.
  26. ^ Michael Sackheim, Michael Schmidtberger & James Munsell, DB Commodity Index Tracking Fund: An Innovative Exchange-Traded Fund, Futures Industry (May/June 2006).
  27. ^ Koyfman, Yevgeniy (2009-08-21). "No Gas: Barclays Halts Issuance of Natural Gas ETN". Indexuniverse.com. Retrieved 2011-10-03.
  28. ^ Bytom Lauricella (2009-11-02). "Gold Mutual Funds Vs. Gold ETFs: It Depends on the Goal". Online.wsj.com. Retrieved 2011-10-03.
  29. ^ "The Future of Commodity ETFs". News.morningstar.com. 2009-08-25. Retrieved 2011-10-03.
  30. ^ David Hoffman, Active ETFs are, well, less active; Dynamics of trading translate into little active management, Investment News (April 21, 2000).
  31. ^ AlphaBaskets.com report on active vs. index ETFs, 'AlphaBaskets.com (April 11, 2011).
  32. ^ Palash R. Ghosh (August 18, 2005). "HOLDRs Vs. ETFs: What Investors Should Know". Investment Advisor. Summit Business Media. Retrieved January 8, 2011.
  33. ^ "ProFunds readies first leveraged ETFs - ETF Investing". MarketWatch. Retrieved 2011-10-03.
  34. ^ "RYDEX ETF TRUST (Form: 485APOS, Received: 11/08/2006 16:27:55)". Esignal.brand.edgar-online.com. Retrieved 2011-10-03.
  35. ^ http://olympiainv.com/Memos/ETFs.pdf
  36. ^ Maxey, Daisy (2009-08-04). "Fidelity the Latest to Caution on ETFs". Online.wsj.com. Retrieved 2011-10-03.
  37. ^ Short and Leveraged ETFs - 3 Pitfalls You Shouldn't Ignore on www.morningstar.com
  38. ^ Fidelity Offers iShares ETFs Commission-Free on news.morningstar.com
  39. ^ John M. Baker, Creation Units and the Rise of Exchange-Traded Funds, Investment Adviser (July 2000).
  40. ^ Mutual Fund Fees Jump 5 Percent on moneywatch.bnet.com
  41. ^ Yates, Tristan. "Tristan Yates: What Can we Learn from the 2008 Leveraged ETF Collapse?". Tradingmarkets.com. Retrieved 2011-10-03.
  42. ^ Dan Culloton, Are ETFs Really More Tax-Efficient Than Mutual Funds? Morningstar (February 14, 2006).
  43. ^ The Problem With Vanguard VIPERs ETFs (2009-12-29).
  44. ^ Vanguard ETFs have Different Tax Considerations Than Other ETFs (2009-12-29).
  45. ^ ETF Tax Efficiency (2009-12-29).
  46. ^ Steve Lodge (2010-04-16). "Are ETF dividends taxed differently? - Yahoo! UK & Ireland Finance". Uk.finance.yahoo.com. Retrieved 2011-10-03.
  47. ^ Gastineau, Gary (2002). The Exchange-Traded Funds Manual. John Wiley and Sons. p. 227. ISBN 978-0-471-21894-4.
  48. ^ Larry Connors, "Trading Covered Calls with ETFs", Tradingmarkets (March 4, 2008).
  49. ^ Amount as of April 2012; figure taken from the home page of http://www.spdrgoldshares.com/.
  50. ^ John Rubino, “Emerging Threat Funds?” CFA Magazine, Sept-Oct 2011. Pp. 30-33.
  51. ^ Global Financial Stability Report: Durable Financial Stability: Getting There from Here, April 2011
  52. ^ Financial Stability Board, “Potential financial stability issues arising from recent trends in Exchange-Traded Funds (ETFs)”, April 2011.
  53. ^ International Monetary Fund, Global Financial Stability Report: Durable Financial Stability: Getting There from Here, April 2011.
  54. ^ Srichander Ramaswamy, “Market structures and systemic risks of exchange-traded funds.” Working paper 343, April 2011. Bank for International Settlements.
  55. ^ John Rubino, “Emerging Threat Funds?” CFA Magazine, Sept-Oct 2011. Pp. 30-33.
  56. ^ John C. Bogle, 'Value' Strategies, Wall Street Journal (February 9, 2007).
  57. ^ Ian Salisbury, Some ETFs Fall Short on Pricing; Certain Trades Slip Below Value of Holdings, Wall Street Journal (November 21, 2008).
  58. ^ ETFs Were Wider Off the Mark in 2009, Wall Street Journal (February 19, 2010).
  59. ^ Wilfred Dellva, Exchange-Traded Funds Not for Everyone, Journal of Financial Planning (April 2001).
  60. ^ Stephen Kovaka, Just Say No to the Silver ETF, SilverSeek.com (27 April 2007)
  61. ^ Theodore Butler, The Smoking Gun, SilverSeek.com (22 August 2008)

Further reading

  • Carrell, Lawrence. ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing. JW Wiley, 2008. ISBN 978-0-470-13894-6
  • Ferri, Richard A. The ETF Book: All You Need to Know About Exchange-Traded Funds. Wiley, 2009. ISBN 0-470-53746-9
  • Humphries, William. Leveraged ETFs: The Trojan Horse Has Passed the Margin-Rule Gates. 34 Seattle U.L. Rev. 299 (2010), available at [1].
  • Koesterich, Russ. The ETF Strategist: Balancing Risk and Reward for Superior Returns. Portfolio, 2008. ISBN 978-1-59184-207-1

External links

[2]



http://en.wikipedia.org/wiki/Exchange-traded_fund 


What is ADR ?

American depositary receipt

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An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US company that trade in the US financial markets. Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).
Shares of many non-US companies trade on US stock exchanges through ADRs. ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock. Over-the-counter ADRs may only trade in extended hours.
The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.

Contents

Depositary receipts

ADRs are one type of depositary receipt (DR), which is any negotiable securities that represents securities of companies that is foreign to the market on which the DR trades. DRs enable domestic investors to buy securities of foreign companies without the accompanying risks or inconveniences of cross-border and cross-currency transactions.
Each DR is issued by a domestic depositary bank when the underlying shares are deposited in a foreign custodian bank, usually by a broker who has purchased the shares in the open market local to the foreign company. A DR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. In the case of companies domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents.

ADR programs (facilities)

When a company establishes an ADR program, it must decide what exactly it wants out of the program, and how much time, effort, and other resources they are willing to commit. For this reason, there are different types of programs, or facilities, that a company can choose.

Unsponsored ADRs

Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each depositary services only the ADRs it has issued.
As a result of an SEC rule change effective October 2008, hundreds of new ADRs have been issued, both sponsored and unsponsored. The majority of these were unsponsored Level I ADRs, and now approximately half of all ADR programs in existence are unsponsored.

Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent.
A majority of American depositary receipt programs currently trading are issued through a Level 1 program. This is the most convenient way for a foreign company to have its equity traded in the United States.
Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization or domicile.
Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets.

Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S. company. In their filings, the company is required to follow U.S. GAAP standards or IFRS as published by the IASB.
The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX).
While listed on these exchanges, the company must meet the exchange’s listing requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program.

A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies.
Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares from its home market to be deposited into an ADR program and traded in the U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and must adhere to U.S. GAAP standards or IFRS as published by the IASB. In addition, any material information given to shareholders in the home market, must be filed with the SEC through Form 6K.
Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information. Examples include the British telecommunications company Vodafone (VOD), the Brazilian oil company Petrobras (PBR), and the Chinese technology company China Information Technology, Inc. (CNIT).

Restricted Programs

Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that allow this type of issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs.

Privately placed (SEC Rule 144A) ADRs

Some foreign companies will set up an ADR program under SEC Rule 144A. This provision makes the issuance of shares a private placement. Shares of companies registered under Rule 144-A are restricted stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs).
US public shareholders are generally not permitted to invest in these ADR programs, and most are held exclusively through the Depository Trust & Clearing Corporation, so there is often very little information on these companies.

Offshore (SEC Regulation S) ADRs

The other way to restrict the trading of depositary shares to US public investors is to issue them under the terms of SEC Regulation S. This regulation means that the shares are not, and will not be registered with any United States securities regulation authority.
Regulation S shares cannot be held or traded by any “U.S. person” as defined by SEC Regulation S rules. The shares are registered and issued to offshore, non-US residents.
Regulation S ADRs can be merged into a Level 1 program after the restriction period has expired, and the foreign issuer elects to do this.

Sourcing ADRs

One can either source new ADRs by depositing the corresponding domestic shares of the company with the depositary bank that administers the ADR program or, instead, one can obtain existing ADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the company on their primary exchange and then swapping them for ADRs; these swaps are called crossbook swaps and on many occasions account for the bulk of ADR secondary trading. This is especially true in the case of trading in ADRs of UK companies where creation of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government; sourcing existing ADRs in the secondary market (either via crossbook swaps or on exchange) instead is not subject to SDRT.

ADR termination

Most ADR programs are subject to possible termination. Termination of the ADR agreement will result in cancellation of all the depositary receipts, and a subsequent delisting from all exchanges where they trade. The termination can be at the discretion of the foreign issuer or the depositary bank, but is typically at the request of the issuer. There may be a number of reasons why ADRs terminate, but in most cases the foreign issuer is undergoing some type of reorganization or merger.
Owners of ADRs are typically notified in writing at least thirty days prior to a termination. Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the Receipt, or do nothing. If an ADR holder elects to take possession of the underlying foreign shares, there is no guarantee the shares will trade on any US exchange. The holder of the foreign shares would have to find a broker who has trading authority in the foreign market where those shares trade. If the owner continues to hold the ADR past the effective date of termination, the depositary bank will continue to hold the foreign deposited securities and collect dividends, but will cease distributions to ADR owners.
Usually up to one year after the effective date of the termination, the depositary bank will liquidate and allocate the proceeds to those respective clients. Many US brokerages can continue to hold foreign stock, but may lack the ability to trade it overseas.

See also

External links


http://en.wikipedia.org/wiki/American_depositary_receipt



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