Exchange traded fund

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An exchange-traded fund ( English exchange-traded fund , ETF ) is an investment fund which continuously on a stock exchange is traded. It is normally not acquired and sold via the issuing investment company , but via the stock exchange on the secondary market . Most exchange-traded funds are passively managed index funds that replicate the composition and development of a securities index . The term “ETF” is therefore also used synonymously with “index funds”.

history

Originally, index funds were the only funds listed on stock exchanges, so both names were used synonymously. However, many actively managed funds are now also traded on stock exchanges. The idea of ​​listing funds on the stock exchange and replicating indices arose around 1970 in the United States. The first fund, Standard & Poor's Depositary Receipt (acronym SPDR, colloquially known as Spider ), was launched in 1993 by wealth management company State Street Global Advisors and is the largest ETF by market capitalization at $ 90 billion. It was followed by Diamonds, based on the Dow Jones Industrial Average , and Cubes (QQQ) based on the NASDAQ-100 .

properties

ETF shares , like normal investment fund shares, certify a proportionate ownership of a special fund that is managed separately from the assets of the issuing investment company.

The investment strategy of exchange-traded funds is usually passive, i.e. the fund management does not invest the fund assets on the basis of its own opinions, but rather tracks the performance of a previously defined benchmark in the form of a financial index (see Index Investing ). Actively managed ETFs are also offered, but these have a very small market share. The distinction to strategy indices is not sharp either.

Additional, independent of the performance of the benchmark yields can achieve the Fund's management by the securities of the investment fund to other capital market participants gives it may earn lending fees.

Exchange-traded funds can be traded on the stock exchange at any time, similar to shares . ETFs differ from normal investment funds, some of which are traded on the stock exchange, in the following ways:

  • Investors usually only buy and sell ETFs on the stock exchange; there are no plans to purchase them through the issuing investment company.
  • The composition of the fund is published once a day.
  • While the net asset value (NAV) of the investment fund is only published once a day for normal investment funds , the ETF issuer determines and publishes an indicative net asset value (iNAV) continuously during the trading day.
  • There are special processes, creation and redemption (see below) for the creation of new ETF shares and the dissolution of existing ones.

The price of exchange-traded funds is determined on the stock exchange by supply and demand, but for arbitrage reasons is usually close to the net asset value of the investment fund. In order to guarantee a liquid market, exchange-traded funds are managed by market makers who continuously set buying and selling prices .

In contrast to this, non-exchange-traded fund units can only be bought and sold through the fund company. The fund company sets a price only once a day.

Exchange-traded notes (ETN) and exchange-traded commodities (ETC) with similar names are to be distinguished from exchange-traded funds (ETFs ). These are not units in a special fund, but rather special types of bonds that are similar to certificates .

costs

Investors in exchange-traded funds bear the following costs:

As is customary with investment funds, the costs incurred are taken from the fund.

Annual management costs are typically less than 1%.

ETFs that pursue a passive investment strategy may incur lower transaction costs and there are no costs for active fund management.

Since ETFs are not bought through the investment company, there is no front-end load that often has to be paid .

Creation / redemption process

The issue of new ETF shares takes place via a process specific to this type of security, the so-called creation process. Similarly, ETF shares are returned to the issuing investment company via the so-called redemption process.

In the creation process, ETF shares are created in blocks of normally 50,000. The Authorized Participant (AP) delivers cash or a basket of securities to the value of the ETF shares to be created to the investment company. In return, this delivers the shares that the market maker can now sell to investors on the stock exchange.

A special feature is the option to deliver a basket of securities. In the simplest case, its composition corresponds to the strategy of the ETF concerned. For example, in the case of an ETF that is intended to replicate the STOXX Europe 50 index , the market maker can deliver a securities portfolio that contains the stocks contained in the index according to their index weights. This approach is called "creation in kind" (roughly: "creation in the same way"). If the new securities are paid for with money, one speaks of a "cash creation" (English, roughly: "creation via cash").

Conversely, the Authorized Participant can return ETF shares to the issuing investment company, e.g. B. if he has bought back a corresponding number on the secondary market. Similar to the creation process, he receives cash or a basket of securities back. Analogous to the creation process, one speaks of “redemption in kind” and “cash redemption” .

Institutional investors who want to buy or sell large volumes can also do so over the counter directly from the investment company using the creation or redemption process. If the investor delivers or receives a basket of securities when buying or selling, this can have tax advantages for him.

Typing of ETF

Exchange-traded funds (ETF) can be characterized according to various criteria. This includes the asset class , the index being tracked and the type of index tracking.

Asset classes

Exchange traded funds are available in a wide variety of asset classes, primarily stocks , bonds , money market , alternative investments , currencies , commodities and real estate .

Indices

The first ETFs were based on market-wide stock indices. In the course of time, the range has expanded, and ETFs were offered on more and more specialized indices in addition to other asset classes. The indices replicated by exchange-traded funds can be classified as follows:

  • Market-wide indices (such as the STOXX Europe 50 or the iBoxx ).
  • Industry indices (e.g. the industry-specific sub-indices of the well-known stock indices).
  • Regional indices, d. H. Indices relating to economic regions (for example emerging markets ).
  • So-called strategy indices.

A “strategy index” is used to denote a large number of very specialized and very different, mostly stock-related indices. The delimitation to other index types is not always clear. This can include:

Type of index replication and swap-based ETFs

There are various techniques used to track the performance of the underlying index with an exchange-traded fund:

  • With the full replication method, all components of the index are held in the respective weighting in the fund.
  • With the sampling method, only a subset of the index constituents is bought into the fund. Typically these will be the stocks that have the greatest weight in the index and have the greatest liquidity.
  • In the case of synthetic index replication, it is not the index constituents but rather swap transactions in the fund that are used to track the performance of the index; the actual index components are generally not located in the fund.

With the full replication, a good representation of the performance of the index can be achieved (minor replication error ). The method has its limits with indices that contain a large number of constituents (individual values) (the well-known S&P 500 share index comprises 500 values). A large number of individual stocks results in higher transaction costs when replicating the index. In addition, many constituents will tend to have more illiquid stocks, which makes replication difficult and can also make it more expensive. Ultimately, the index weights of the individual values ​​rarely correspond to whole numbers of securities, a problem that is increasingly evident in performance indices with regard to the reinvestment of income. In addition, full replication cannot be used if the ETF's underlying index contains values ​​that are not freely tradable.

Since with large indices that are not equally weighted, some values ​​only have a low weight and thus little influence on the index development, one can avoid these problems with the sampling method. However, the replication error tends to be larger.

Synthetic index replication is a recent development. It enables or simplifies investing in very illiquid or not freely tradable assets via ETFs. With this method of replication, the investment fund contains securities that may have little or no connection to the index to be replicated. In addition, there are swap transactions ( equity swaps , total return swaps ) in the fund, with which the performance of the papers is exchanged for that of the desired index.

With the synthetic index replication, a smaller replication error can be achieved. In addition, swaps in the investment fund can be used to achieve both tax advantages and technical advantages with regard to business transactions.

Risks

For various reasons, the performance of the ETF can differ from the performance of the underlying index. Due to this replication error , the investor runs the risk of not participating in the desired performance. Conversely, this also includes the chance of outperforming the index.

For an investor, the risk of loss primarily arises from the market price risks resulting from price fluctuations in the ETF . ETFs on market-wide indices are essentially general or unspecific market price risk (market risk in the sense of the Capital Asset Pricing Model ), since market-wide indices are highly diversified . With specialized ETFs, there are also special or specific market price risks (e.g. country risks, industry risks). The ETF's asset class determines which type of market price risk is mainly relevant (equity risk, interest rate risk, etc.). When the ETF invests in bonds, there is also the risk of counterparty default (credit risk) for the bond debtors in the fund.

In swapbasierten ETF is compared with the business partners with which the fund closes the swaps, an address in the form of risk of the counterparty risk . Under the conditions of EU regulation ( UCITS Directive ), the value of derivative transactions may not exceed 10 percent of the net asset value of an investment fund, so that the counterparty risk is limited to this portion. By collateral of swap contracts the counterparty risk can be further reduced. In fact, the majority of providers have an average swap risk of no more than 2 percent.

In addition, counterparty risks arise when securities are lent out of the investment fund . Securities lending transactions are generally carried out with collateral. The risk of securities lending transactions therefore essentially consists in the fact that, if the borrower defaults, the value of the collateral received will not be sufficient to procure the securities on the market again.

There is no counterparty default risk vis-à-vis the issuer of the ETF shares, i.e. the investment company, because of the structure as a special fund.

The provision of a liquid market is the task of the market maker. This limits the market liquidity risk . In addition, the systemic risks have recently been emphasized, which arise, for example, from the fact that the securities in the investment fund differ from those in the index and thus a selling panic in one market segment can be transferred to other segments.

On August 24, 2015, after a weak stock market start in the United States, the prices of some ETFs suddenly fell far more sharply than the indices they are supposed to track. One reason for this was that ETF investors willing to sell could not find buyers. The problem was attributed to specifics in the rules of the New York Stock Exchange. Deutsche Börse assured that comparable crashes were not possible on their systems.

Products and trading opportunities

On April 11, 2000, the Frankfurt Stock Exchange set up a separate stock exchange segment called "XTF" for trading in ETFs.

The EUREX futures exchange offers options and futures on a number of ETFs from various issuers. Most of the underlying ETFs are based on market-wide stock indices. Compared to the usual exchange-traded futures contracts, the contracts have a small contract volume (1 contract typically relates to 100 fund units) in order to make them more suitable for private investors.

Stock lending and short selling are possible with ETFs .

This basically gives rise to numerous arbitrage opportunities for ETFs on liquid indices: on the one hand between the cash market and the exchange futures market for ETF shares themselves, on the other hand between these markets and the markets on which the ETF is based (stock market, bond market, etc.) and finally between the ETF Markets and the futures markets for the underlying products (e.g. between stock index ETFs and the associated ETF derivatives on the one hand and stock index futures and stock index future options on the other).

Since 2007 there have been funds of funds that invest in ETFs alone (ETF funds of funds). Further savings plans offered to ETF.

ETF provider

Largest ETF providers in Europe (as of 2017)
Surname Issuing investment company Assets
under management in billions of euros 		Market share
in%
iShares BlackRock (USA) 299 44.52
Xtrackers DWS (Germany) 071 10.62
Lyxor Société Générale (France) 064 09.57
UBS UBS (Switzerland) 042 06.33
Amundi Amundi (France) 038 05.66
Vanguard The Vanguard Group (USA) 030th 04.49
SPDR State Street Corporation (USA) 022nd 03.35
ETF Securities WisdomTree (USA) 017th 02.57
Source Invesco (USA) 016 02.36
Deka DekaBank Deutsche Girozentrale (Germany) 009 01.36
total 608 90.83

Market volume

The volume of the market for exchange-traded funds (ETF), measured in terms of assets under management , has grown almost steadily around the world since the early 1990s. There was only a decline in 2008, which was due to the fall in prices in the wake of the financial crisis ; ETF recorded a net inflow of funds in 2008 as well. Assets under management were $ 142 billion in 2002, $ 797 billion in 2007 and $ 1 trillion in 2009.

In Germany the market volume increased from 5 billion euros in 2002 to 64 billion euros in 2007. Across Europe, the volume in 2009 was 160 billion euros. At the end of December 2015, the market volume in Europe was 511 billion euros.

ETFs are used as a form of investment by both private and institutional investors . Institutional investors use ETFs, among other things, to map the passive part of their investment strategies. In 2008, the proportion of investments that institutional investors had passively invested in ETFs was around 3 percent. In addition, ETFs are used for liquidity management. Due to their comparatively low fees and their good tradability, they are also suitable for temporarily parking liquid funds.

Influence on the economy

Since the capital of the customers of the same provider is invested in competing companies at the same time, this influences the orientation and competition of these companies in the market.

literature

  • Stiftung Warentest (Ed.): Finanztest Spezial. Investing with ETF. Berlin 2017, ISSN 1438-8650. (The special issue with 742 rated funds was published in December 2017)
  • Michael Huber, Marc Weber, Manuel Rütsche, Dr. Ryan Held, Sascha Freimüller: Successfully investing with ETFs . Finanzbuch Verlag, Munich 2016, ISBN 978-3-89879-994-2 .
  • Gerd Kommer: Investing confidently with index funds and ETFs: How private investors win the game against the financial sector ; 5th edition, Campus Verlag, Frankfurt / Main 2018, ISBN 978-3-593-50852-8 .
  • Anna-Maria Borse, Edda Vogt, Stephan Kraus, Dagmar Wojcik: ETF manual: Know-how for your investment . Deutsche Börse AG, Frankfurt / Main 2014. ( Online PDF ).
  • Alain Picard, Gregor Braun: Exchange Traded Funds (ETF): Basics, functionality and practical use . 2nd updated edition. Finanz und Wirtschaft, Zurich 2010, ISBN 978-3-906084-89-3 (published by Swiss Exchange GmbH).
  • Stephanie Lang: Exchange Traded Funds - Success Story and Future Prospects . WiKu-Wissenschaftsverlag, Cologne 2009.
  • Martin T. Bohl, Harald Henke, Marzena Kaczynska: Exchange Traded Funds . In: Business Studies . No. 3 2006, pp. 337-341, 378.
  • Elisabeth Hehn (Ed.): Exchange Traded Funds, Structure, Regulation and Application of a New Fund Class . Springer / Berlin, Heidelberg 2005.
  • Alexander Etterer, Martin Wambach, Hubert Ralph Schmitt: Exchange Traded Funds, the investment revolution for private investors! Finanzbuch Verlag, Munich 2004.

See also

Individual evidence

  1. ↑ Exchange-traded funds. Fund dictionary. In: Finanztreff.de. Retrieved July 12, 2017 .
  2. ↑ a b c d e f g h i j k l m Alain Picard, Gregor Braun: Exchange Traded Funds (ETF). Basics, functionality and practical use . 2nd Edition. Finanz und Wirtschaft, Zurich 2010, ISBN 978-3-906084-89-3 ( table of contents [PDF]).
  3. ↑ What are ETFs? In: ETF.at. July 19, 2020, accessed July 25, 2020 .
  4. ↑ Jennifer Bayot: Nathan Most Is Dead at 90; Investment Fund Innovator. In: The New York Times. December 10, 2004, accessed July 25, 2020 .
  5. ↑ Wilfred Dellva: Exchange Traded Funds Not for Everyone . In: Journal of Financial Planning . tape 14 , no. 4 , 2001, p. 110–125 (English, reprint ( memento of October 5, 2006 in the Internet Archive ) [PDF; 419 kB ; accessed on July 25, 2020]).
  6. ^ A b Financial Times Deutschland of October 18, 2011: The boundaries are blurring. Special supplement, page A1.
  7. ↑ a b c d Bohl, Henke, Kaczynska: Exchange Traded Funds , p. 340.
  8. ↑ a b c Jens Kleine: Exchange Traded Funds - the underestimated size . In: Journal for the entire credit system . 68, No. 16, 2008, pp. 779-781.
  9. ↑ a b c d e f g h i Lamprecht: Exchange Traded Funds .
  10. ↑ Dominique Riedl: Synthetic replicating ETFs - How risky is a swap ETF? In: justETF. DR Investment Control GmbH, July 4, 2012, accessed December 26, 2015 .
  11. ↑ What is a swap ETF. Archived from the original on September 20, 2011 ; Retrieved April 14, 2011 .
  12. ↑ cf. also: Hortense Bioy, Gordon Rose: Securities Lending in Physical Replication ETFs: A Review of Providers' Practices. Morningstar ETF Research, August 2012. PDF, 641 kB
  13. ↑ Ulrich Seubert, Sebastian Müller, Martin Weber: Limiting the risks , p. 14.
  14. ↑ a b Tim Kanning: ETF investors should also think about selling. In: FAZ.net . February 3, 2016, accessed February 4, 2016 .
  15. ↑ Exchange Traded Funds (ETFs). Instruments for passive investment strategies. In: xetra.com . Deutsche Börse , accessed on September 19, 2018 .
  16. ↑ Eurex: Exchange Traded Products Derivatives. In: eurexchange.com . Retrieved September 19, 2018 .
  17. ↑ Ali Masarwah: ETF industry in Europe reached new record highs in 2017. In: morningstar.de . January 12, 2018, accessed September 18, 2018 .
  18. ↑ The information comes from a study by the financial company BlackRock . Lamprecht: Exchange Traded Funds quotes different figures from a report by the Graubündner Kantonalbank.
  19. ^ Anette Walker: Exchange Traded Funds (ETFs). Triumphant advance in financial advice . In: Bankmagazin . 59, No. 4, 210, supplement FinanzBusiness p. II-III.
  20. ↑ The information on the share of ETFs among institutional investors comes from a study by the ETF provider ETFLab.
  21. ↑ BlackRock - The uncanny power of a financial corporation , arte from September 16, 2019 (YouTube)