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What is Exchange-traded fund

WHAT IS AN EXCHANGE TRADED FUND (ETF)?

An Exchange Traded Fund (ETF) is a type of fund that replicates the performance of a tracking index, such as stock index.

MORE DETAILED INFORMATION ABOUT SSIAM'S ETFs HERE

Advantages of investing in ETFs

Exchange traded fund vs Open-ended fund

Trading method

How to calculate value of an ETF

THE ADVANTAGES OF INVESTING IN ETFs

Access to a diversified investment portfolio (at a low cost)

An ETF is a collection of the component securities of a tracking index. Therefore, when an investor holds ETF certificates, the investor is indrectly holding a list of stocks with proportions similar to that of the tracking index.

In-depth knowledge of a particular stock not required

It is time consuming to go through the process of analyzing and trading directly in a specific stock. This process is increasingly arduous as the number of listed stocks rises up to thousands.

Easily invest in the stock market

By investing in ETFs, investors can invest in a basket of securities, which is easy to monitor and is more suitable for retail, non-professional investors, foreign investors, or institutional investors. Additionally, investment in a collection of securities (index investing) helps to diminish the risk of market manipulation.

Attractive foreign indirect investment

ETFs are the fastest way for foreign investors to get access to the Vietnam stock market. Being an open-ended fund, foreign investors are not restricted in the number of ETF fund certificates they can own. hrough ETFs, foreign investors will indirectly own shares that have reached the maximum foreign ownership ratio (FOL) that they cannot acquire directly. However, it should be noted that, foreign investors will not receive shares that have reached this maximum FOL ratio when they redeem their ETF. Instead, the asset management company will sell the excess FOL quantity and return the corresponding cash amount to investors.

EXCHANGE TRADED FUND VS MUTUAL FUND – THE SIMILARITIES

Mutual fund and ETF are both open-ended funds in which certificates are continuously issued and redeemed without limits.
Both funds set multiple investment targets to meet the demands of different investors.

EXCHANGE TRADED FUND VS MUTUAL FUND –THE DIFFERENCES

ETF	Mutual Fund
Besides the primary market, investors can buy and sell ETF certificates on the stock exchange (the secondary market) as an ETF is listed and traded like a stock.	Investor can only trade mutual fund certificates directly through the fund management company (primary market).
ETFs replicates a tracking index, pursuing a passive investment strategy.	Mutual funds normally implement an active investment strategy with investment portfolio being carefully selected.
ETFs' operation costs are lower. Thanks to the passive investment strategy of replicating a tracking index, the management cost is reduced.	Mutual fund’s operation cost is higher as it requires the active management from an investment team.
The price of an ETF certificate is calculated based on the trading transactions within the day and is maintained close to Net Asset Value per fund certificate (NAV/Unit).	The price of mutual fund certificate is the Net Asset Value per fund certificate (NAV/Unit).

TRADING METHOD

In the primary market, an ETF does not issue separate fund certificates directly to investors and only issues certificates in creation units. In Vietnam, a creation unit of ETF includes a minimum of 100.000 ETF certificates.
Investors in the primary market do not buy ETF creation units by cash, but exchanges component securities for ETF units. Such securities replicate the portfolio of an approved tracking index. Normally investors who directly buy creation units are investment organizations and/or authorized participants.
After buying creation units, investors can sell smaller batches of ETF units in the secondary market. This allows small investors, who are not capable of buying the whole creation unit, to invest in ETFs.
Investors who wants to sell ETF certificates are given two options: (i) sell separate certificates to other investors in the secondary market, or (ii) redeem creation units with an asset management company.

HOW TO CALCULATE THE VALUE OF AN ETF?

An asset management company calculates and announces daily Net Asset Value (NAV) of the fund and NAV/Unit based on market value of the component securities and the fund’s operating cost.
Within trading sessions, the market value of the fund certificate may change continously as the price of stocks in the portfolio often fluctuates due to changing investors’ buy and sell demands.
However, arbitrage keeps market value of ETF certificate close to NAV/Unit:
- If the price of ETF certificate is higher than NAV/Unit, arbitrageur can buy component securities to exchange for ETF certificate and then sell ETF certificates in the stock market to earn a profit.
- If the market price of ETF certificate is lower than the NAV/Unit, arbitrageur can buy ETF certificates to exchange for component securities, and then sell such securities in the stock market to earn a profit.

Admin

Published:

08/07/2024

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