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    CSC Ch19 Exchange Traded Funds

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    lily north
    Exchange traded funds (ETFs) are regulated as either mutual fund trusts or corporations in Canada. They are regulated by National Instrument 81-102 and overseen by IIROC and MFDA. ETFs offer low costs, tradability, tax efficiency, and transparency compared to other managed products. There are various types of ETFs including index based, rules-based, active, synthetic, leveraged, inverse, and commodity ETFs. Risks include tracking error, concentration risk, and risks related to the ETF's composition and securities lending. ETFs also differ from mutual funds in areas like management style, fees, distributions, tradability, and tax treatment.

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    CSC Ch19 Exchange Traded Funds

    Uploaded by

    lily north
    117 views9 pages
    Exchange traded funds (ETFs) are regulated as either mutual fund trusts or corporations in Canada. They are regulated by National Instrument 81-102 and overseen by IIROC and MFDA. ETFs offer low costs, tradability, tax efficiency, and transparency compared to other managed products. There are various types of ETFs including index based, rules-based, active, synthetic, leveraged, inverse, and commodity ETFs. Risks include tracking error, concentration risk, and risks related to the ETF's composition and securities lending. ETFs also differ from mutual funds in areas like management style, fees, distributions, tradability, and tax treatment.

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    Canadian Securities 2

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    Exchange traded funds (ETFs) are regulated as either mutual fund trusts or corporations in Canada. They are regulated by National Instrument 81-102 and overseen by IIROC and MFDA. ETFs offer low costs, tradability, tax efficiency, and transparency compared to other managed products. There are various types of ETFs including index based, rules-based, active, synthetic, leveraged, inverse, and commodity ETFs. Risks include tracking error, concentration risk, and risks related to the ETF's composition and securities lending. ETFs also differ from mutual funds in areas like management style, fees, distributions, tradability, and tax treatment.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    117 views9 pages

    CSC Ch19 Exchange Traded Funds

    Uploaded by

    lily north
    Exchange traded funds (ETFs) are regulated as either mutual fund trusts or corporations in Canada. They are regulated by National Instrument 81-102 and overseen by IIROC and MFDA. ETFs offer low costs, tradability, tax efficiency, and transparency compared to other managed products. There are various types of ETFs including index based, rules-based, active, synthetic, leveraged, inverse, and commodity ETFs. Risks include tracking error, concentration risk, and risks related to the ETF's composition and securities lending. ETFs also differ from mutual funds in areas like management style, fees, distributions, tradability, and tax treatment.

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    © All Rights Reserved
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    of 9

    Managed Products

    CHAPTER 19: Exchange Traded


    funds

    CSI Global Education Inc.


    Regulation and Structure of ETFs
    • Mutual Fund Trust – incomes generated are taxed in the hands of the
    investor
    • Mutual Fund Corporations – incomes taxed by corporation
    • Regulated by National Instrument (NI) 81-102.
    • Investment Industry Regulatory Organization of Canada (IIROC) –
    Dealers
    • Mutual Fund Dealer Association(MFDA) -Dealers
    • Disclosure Document – ETF Facts
    In addition to Fund Facts, includes: market price, bid-price spread,
    premium and discounts to Net Assets Value (NAV).
    Distributed by dealer where fund is bought.

    CSI Global Education Inc. 2


    Key Features of ETFs
    Low cost –much lower MER than other managed products.
    Tradability, liquidity, continuous pricing –trades like stock on the
    stock market.
    Low tracking error –return on the underlying index and the return
    on the fund.
    Tax efficiency –very little or no buy and selling of the securities in
    the ETF.
    Transparency –holdings are generally published daily.
    Low cost diversification- due to high correlation within sectors or
    assets classes.
     Targeted exposure – allow investors to access broad range of
    assets.
    CSI Global Education Inc. 3
    Types of ETFs
    • Index Based –invest in an existing index, eg DJIA, S&P Composite, etc.
    • Rules-based – constructed index that focuses on sectors of the market
    that give higher returns or lower risk.
    • Active –managers actively buying and selling securities
    • Synthetic – constructed with derivatives to get returns like an index
    • Leveraged –similar to synthetic, use derivatives to get leverage effect.
    • Inverse - similar to synthetic, use derivatives to get inverse return effect.
    • Commodity – invest in commodity itself, futures, listed commodity
    companies.
    • Covered Call –invest in covered calls.

    CSI Global Education Inc. 4


    Risks of Investing in ETFs
    Risk related to tracking error
    •Fees and Expenses –not included in the returns.
    •Sampling method- do not hold all in the securities in the
    underlying index.
    •Liquidity –not all securities in the index are liquid, therefore
    affects value at time of redemption.
    •Cash Drag- all cash in not fully invested.
    •Rebalancing –securities are removed and added to the
    index over time.
    •Currency hedging -value affected when foreign currency
    fluctuates.
    Concentration Risk
    •High investment in small number of holdings.

    CSI Global Education Inc. Source: CSC Textbook 5


    Risks of Investing in ETFs

    Risk related to the composition of the ETF


    •Returns and volatility depends on the holdings in each ETF
    Risk related to securities lending
    •ETFs companies lend investors sotcks for investing.
    •Risk is based on the default the borrower
    •Risk of money market bought and received.

    CSI Global Education Inc. Source: CSC Textbook 6


    Mutual Funds vs ETFS
    • Management Style – ETF passive, MF active
    • Transparency – generally full transparency , ETF, MF
    • Cash Drag- ETF –usually all cash invested, MF –not fully invested
    • Embedded fees – ETFs much lower than MFs.
    • Advisor compensation –fees for trading ETFs, MFs –MER
    • Distribution –ETF’s trades likes stocks, MFs –valued daily.
    • Tradability – ETFs can use all trading strategies like stocks- intra-day trading, short,
    margin, etc; MFs –cannot use those strategies.
    • Minimum Investment- ETF- per share, MFs –minimum $100
    • Dividend reinvestment –EFT –very few, MFs –all
    • Liquidity – ETFs – anyime, MFs – end of the day.
    • Tax efficiency- EFTs are more tax efficient than MFs.
    • Tracking error – EFTS has less tracking error than MFs.

    CSI Global Education Inc. 7


    Taxation of ETFs
    • Distributions- capital gains, incomes, dividends
    • Non-Taxable Distributions- rare but some EFTs can
    distribute a return of capital.
    • Sales of ETFs- capital gains realized.

    CSI Global Education Inc. 8


    Investment Strategies using ETFs

    • Use Limit orders to protect the trade from sudden


    movement in price.
    • Place large portions of trade at once – broker to reliaze
    the need to create more units.
    • Avoiding trading when markets of the underlying securities
    are closed.
    • Avoiding trading when any major holding in the ETF is halted.

    CSI Global Education Inc.

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