What are Exchange Traded Funds?
Exchange traded funds (ETFs) are fund-share hybrid investment vehicles that combine the best of both worlds: the diversification of a fund's portfolio and the flexibility that share trading offers.
Units of ETFs are traded and settled as any other share. As opposed to the units of traditional investment funds - that can only be subscribed and redeemed at its net asset vale (NAV), necessarily calculated after the market close - units of ETFs can be bought and sold on the stock market, just as ordinary shares, with the same trading fees.
The second main feature of ETFs is that they are index funds, i.e. its investment policy consists on tracking the performance of a certain index (IBEX 35, DJ EuroStoxx 50, Nasdaq 100, DJ Industrial Average, IBEX Medium Caps...). As the offer of tradable indices grows, so does the variety of ETFs.
Liquidity of ETFs is, in essence, that of the underlying portfolio of securities that make up the tracked index. Access to this liquidity is guaranteed by specialists or market makers that take on the public commitment to placing constant bid and offer prices to the ETFs under their coverage. Price spreads and market depth have to be kept within certain parameters settled prior to their listing, compliance is supervised by the Exchange.
ETFs have opened a broad array of investment opportunities, for institutional and retail investors alike. With one simple trade, ETFs enable investors to get easy and cost competitive exposure to a wide range of asset classes.
Main features of ETFs
ETFs are very accessible to investors. ETFs are bought and sold by ordinary financial intermediaries on the same trading hours as shares.
ETFs´ trading allows buying and selling at any time of a trading session, with no need to wait till the end of the session to get the net asset value of the portfolio.
As ETFs replicate an index, the composition of the ETF is available all the time. Real-time information on both the index and the ETF is available during the trading session, so the ETFs prices are easy to verify. The market offers all relevant information on traded products: prices, trading volumes, daily composition of the ETFs portfolio, net asset value and indicative net asset value in real-time
ETFs are high liquidity products. ETFs are traded on the Stock Exchange Interconnection System (SIBE) and the investor can buy or sell at any time of the session. Market specialists provide liquidity offering buying and selling positions all the time.
Institutional investors daily operate with ETFs, a product already consolidated in the international markets.
Advantages of ETFs
Each ETFs participation represents a portfolio of shares that is traded on a Stock Exchange. The portfolio efficiently replicates an index.
ETFs provide exposure to a portfolio of shares or bonds in a single transaction.
Efficient Cost/ Low Trading Costs
If an investor wants to replicate an index, he should buy all stocks of such an index in his portfolio and do it according to the particular weight of each stock in the index. However, buying ETFs, an investor can replicate the index with a single transaction. ETF do also offer an automatic replication of the index as the tracking and composition of the index is made by a fund manager. They also offer lower commissions than active management products.
ETFs´ management allows strategies that complement those of derivative products.
FAQs about ETFs
Exchange Traded Funds are mutual funds that track the performance of an entire index or basket of securities. The ETF participation is traded in real time on an exchange electronic market subject to the same conditions as any other security stock.
The main difference is that ETFs are listed on the exchange and can be bought and sold throughout the trading day. In traditional investment funds the trading takes place once a day, at the closing of the market, and at the available net asset value.
ETFs are highly transparent products. Being passive management investment funds, the composition of the portfolio is known all the time.
Through an ETF you invest in a diversified portfolio in a single transaction portfolio, which is that of the referential index.
Given the wide range of investment strategies ETFs allow, they are products both suitable for institutional and individual investors. Although being a passive management product, ETFs are frequently used at the same time as individual shares or investment funds. They are used for both long-term and short-term investment strategies. It is important, like in any investment strategy, to be cautious enough: "How to Invest".
Investing in ETFs involves the same risks as investing in shares. But the risk may be minimised by the diversification that a single participation displays.
ETFs are bought and sold like ordinary shares through financial intermediaries which are members of the exchange (Brokers, Broker-dealers and Financial entities).
Differences among ETFs that track the same index will be defined by those issuing each ETF. All specifications in terms of commissions, dividend policy and ratio of the index represented are included in the ETFs´ Prospectus.
The costs will be those corresponding to Exchange Trading Commissions.
The fund manager gets information on the dividends paid by all companies of the portfolio. The dividend policy for each ETF is specified on the Prospectus.
Transparency is an essential feature of the ETF market. Information on prices, trading volumes, daily composition of the fund and the basket of securities, net asset value and indicative net asset value is available throughout the session. This information is available on the web-site of the exchange and through all other information-dissemination channels.
The price is formed, like in the case of shares, according to the bid and ask positions in the market.
The net asset value is set once a day. The price of the ETF will be the market price at any moment. The evolution of prices of all securities in the portfolio will settle the indicative net asset value through the session and the net asset value at the closing of the market session.
The presence and performance of specialists is essential in the ETF segment in order to foster liquidity and to ease the dissemination of information and the price formation process. Keeping a maximum spread of prices for a specific volume, specialists allow negotiations on the secondary market at prices in line with the indicative net asset value of the ETF. Additionally, while acting on the primary market, specialist provide an adequate number of ETF participations in the market.
Investors can purchase as little as one share.
Not necessarily. The price of the exchange traded fund accumulates dividends paid by all securities of the portfolio, what increases the price of the ETF with reference to the underlying index.
Price of the ETFs participation which is calculated with reference to the performance of the fund underlying index. The fund managing entity sets the net asset value at the closing of the trading session, dividing the shareholders' equity between the number of units in circulation.
Yes it is. The indicative net asset value is calculated by assigning the daily variations of the underlying index to the official net asset value communicated daily by the investment fund managing entity. There is also the possibility to make a comparison between the above mentioned indicative net asset value and the price of the ETF participation.
Yes there are. The trading of Special Operations on the ETFs segment is similar to the trading of Special Operations for individual shares. ETFs trading is both possible in the block trading and the Special Operations segment.
The ETF prospectus is available both on this website and on the website of the Spanish Security Exchange Commission (CNMV).
It is important that investors read the prospectus carefully before investing and get all specific information on the product.
No, they do not. You can keep ETFs as long as you want.
Capital Gains are taxed according to the following scheme:
|19% up to 6,000€|
|21% from 6,000€ to 50,000€|
|23% from 50,000€ to 200,000€|
|26% from 200,000€|
As opposed to the investment funds, any kind of withholding is applied on the capital gains produced from the repayment or transmission of the ETFs.
Under the collective investment entities regulation, the ETFs will not be able to apply the tax deferral for transfer. That is to say, the capital gains or losses raised as a result of a transfer of the ETF participations to another collective investment entity, or vice versa, will not be able to earn the tax relief for transfer foreseen for the rest of the funds.
The initials correspond to "Total Expense Ratio", and indicates the percentage of expenses supported by the Fund in relation with its average assets, from the beginning of the natural year up to the date. The total expenses include the commissions of management and depositary services, the external services and other operating expenses.
It is important to consider that, except in December, this figure does not reflect annual data.
The composition of this concept comes established in the Annex of Circular 3/1997 of CNMV, on obligations of information to partners and unit holders of IIC of financial character.