What is Exchange-traded fund

WHAT IS EXCHANGE TRADED FUND (ETF)?

Exchange traded fund (ETF) is a type of fund which replicates 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

ADVANTAGES OF INVESTING IN ETFs

Having a diversified investment portfolio (at low cost)

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

No need to have in-depth knowledge of a particular stock

Investment directly in a specific stock is time consuming to analyze and trade stocks. This has become more arduous as the number of listed stocks is getting larger, up to thousands.

Easily invest in stock market

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

Attract foreign indirect investment

ETF is the fastest way for foreign investors to get access to Vietnam stock market. Being an open-ended fund, ETF allows foreign investors to invest in ETF without limit. Through ETF, foreign investors indirectly hold stocks having full foreign ownership limit (FOL), which they cannot buy directly. However, it should be noted that, foreign investors will not receive those stocks when they redeem ETF, as asset management company will sell the FOL excess quantity and pay investors equivalent amount of cash.

EXCHANGE TRADED FUND VS MUTUAL FUND – THE SIMILARITIES

Mutual fund and ETF are open-ended fund in which certificates are continuously issued and redeemed unlimitedly.
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 ETF is listed and traded like a stock.	Investor can only trade mutual fund certificates directly through the fund management company (primary market).
ETF replicates a tracking index, pursuing passive investment strategy.	Mutual fund normally implements active investment strategy with investment portfolio being carefully selected.
ETF’s operation cost is lower. Thanks to passive investment strategy replicating a tracking index, the management cost is reduced.	Mutual fund’s operation cost is higher as it requires active management of an investment team.
The price of ETF certificate is calculated based on the trading transactions within the day and is maintained to be 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, 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 minimum 100.000 ETF certificates.
Investor in the primary market does 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 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 ETF.
Investor who wants to sell ETF certificates is given 02 options: (i) sell separate certificates to other investors in the secondary market, or (ii) redeem creation units with asset management company.

HOW TO CALCULATE VALUE OF AN ETF?

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

MORE DETAILED INFORMATION ABOUT SSIAM'S ETFs HERE