ETFplus THE ETF AND ETC MARKET. The ETF and ETC market - I

Transcription

1 ETFplus THE ETF AND ETC MARKET The ETF and ETC market - I

2 Index Introduction 1 ETFs - Exchange Traded Funds 2 Structured ETFs 6 ETCs - Exchange Traded Commodities 8 ETFplus: Segmentation and microstructure 12 ETFplus - II

3 Introduction ETFplus is the regulated electronic market of Borsa Italiana fully dedicated to the trading of: ETFs (Exchange traded funds) Structured ETFs ETCs (Exchange traded commodities) i.e. of fi nancial instruments that replicate the performance of indices (equity, fi xed income and commodities) or single commodities. Originarily introduced in the United States in the early nineties, the ETFs have become part of the securities at disposal of Italian investors in September Simple, transparent and economic, since then they have achieved growing success, witnessed by a considerable increase in the volumes of trading and by the increasingly higher number of new products listed. TRADED VOLUME IN MLN NUMBER OF CONTRACTS (3 mesi) (3 mesi) With ETFplus the investment opportunities of investors have extended. This market represents the natural evolution of the world of passive instruments and satisfi es the need to give life to a context where, in addition to ETFs also innovative UCITS (Undertakings for Collective Investment in Transferable Securities) the so-called structured ETFs, and other categories of fi nancial instruments may be traded, which, even though they are not funds, they have the same operating mechanism. These are in particular the Exchange Traded Commodities (ETCs), i.e. securities issued to cover the direct investment of the issuer in commodities (e.g. gold bars) or commodities derivative contracts. The price of ETCs is, therefore, directly or indirectly related to the performance of the underlying, exactly like the price of ETFs is linked to the value of the reference index. The ETF and ETC market - 1

4 Exchange Traded Funds What they are ETF is the acronym for Exchange Traded Fund, a term by which a particular type of mutual investment fund or Sicav is identifi ed and whose main features are: it is traded on the Stock Exchange like a share; it tracks the reference index (benchmark) through a totally passive management. An ETF summarizes the typical features of a fund and a share, enabling the investors to benefi t from the strengths of both instruments: diversifi cation and reduction of the risk typical of funds; fl exibility and transparency of information typical of shares traded in real time. Main features The ETF allows: # to take position in real time on the target market with one single purchase transaction: by purchasing an ETF it is possible to take position over a market index (S&PMIB, DAX, Nasdaq100, S&P500 ) in real time for a price that perfectly refl ects the value of the index components at that given time; since the minimum trading quantity is always equal to a unit/share, the investor may purchase the ETFs also investing just a few hundred euros. # to track the performance of the benchmark index: the ETF allows to obtain a return equal to that of the reference benchmark through a totally passive management, i.e. replicating exactly the composition and weights of the index to which it refers. It must be considered, however, that if the reference currency is other than the trading currency (which is always the euro), the return of the ETF may be different from that of the benchmark as a result of the devaluation/ revaluation of such currency compared to the euro. # to have a market price that is constantly aligned to the NAV: thanks to the particular mechanism referred to as creation/redemption ETFplus - 2

5 in kind, which enables the authorised participants to create and redeem the units exchanging the ETFs with all the securities making up the reference index and vice-versa (primary market), the price on the Stock Exchange is constantly aligned to the offi cial value of the ETF, the Net Asset Value (NAV). Moreover, an ETF modifi es its assets automatically in order to conform to the periodical variations of the weights and constituents of the reference index, therefore, the investor is never engaged in re-balancing the assets. # to obtain a broad diversification: to invest in an ETF means to take easily position on a market index, which in general consists of a large basket of securities, thus diversifying and decreasing the investment risk. Suffi ce it simply to think to the transaction costs and the capital that should be invested for purchasing all the securities making up the S&P/MIB index in the same proportions requested by the operating rules of the index. # to reduce the costs of one s own portfolio: the ETFs are subject to a low total annual commission (TER) applied automatically in proportion to the holding period, whilst the investor is charged no Entry, Exit and Performance fees. The investor must only take into consideration the fees applied by his own bank/broker for the purchase and sale on the market. # to benefit from periodical proceeds: the dividends or interests that an ETF collects in relation to the shares/bonds included in its assets (as well as the proceeds from the re-investment of these) may be re-distributed periodically to the investors or permanently capitalized in the assets of the ETF. In both cases, the benefi ciary is only the investor. # to reduce the issuer s risk: the ETFs listed on ETFplus are, depending on the instrument, Mutual Investment Funds or Sicav (UCITS). It is a known fact that UCITS have segregated assets with respect to those of the companies, which take care of their creation, management, administration and marketing activities. Therefore, ETFs are not subject to the insolvency risk in the event of default of the above-mentioned companies. The ETF and ETC market - 3

6 Exchange Traded Funds Investment modalities The ETFs make it possible for all investors to access the desired market by tracking indices covering a wide range of investment categories: BOND AND LIQUIDITY INDICES Government bonds denominated in euro, US dollar, pound sterling and segmented according to maturity. Corporate bonds of the euro and US dollar areas. Liquidty ETFs linked to euro, US dollar and sterling overnight interest rates. EQUITY INDICES REPRESENTATIVE OF SINGLE MARKETS AND ENTIRE GEOGRAPHIC AREAS Italy, UK, Germany, Switzerland, Japan, Europe, USA, Australia, etc. EQUITY INDICES OF EMERGING MARKETS China, India, Russia, Brazil, Turkey, Korea, Taiwan, Vietnam, Select frontier, etc. EQUITY INDICES RELATING TO DIFFERENT SECTORS OF ACTIVITY automotive, technological, telecommunications, utilities, banks, energy, fi nancial services, etc. STYLE EQUITY INDICES mid cap, small cap, value, growth, select dividend COMMODITIES INDICES INDICES OF REAL ESTATE COMPANIES OR PRIVATE EQUITY FUNDAMENTAL AND QUANTITATIVE INDICES indices composed of stocks selected by using fundamental factors (sales, cash, book value, dividends, etc.) and/or momentum criteria. THEMATIC INDICES Indices related to particular sectors such as water, clean energy, timber, etc. This wide range of ETFs available on ETFplus allows investors to diversify in the best way the composition of their own portfolio reducing the risk and maintaining effi ciency from the standpoint of costs. ETFplus - 4

7 Europe Russia Japan China Korea USA Brazil Southafrica Taiwan Vietnam India Turkey Australia Thanks to the listing on the stock exchange, the ETFs have a broad fl exibility of use, which makes them the suitable instruments for exploiting any expectations on the evolution of the markets or needs of investors: Short-term trading (trading intra-day): in consideration of the high liquidity that characterizes them, the ETFs may be utilized exactly like the shares, for catching intra-day movements of the reference index and, therefore, for mere trading purposes; Long-term investment: the ETFs have no maturity and it is, therefore, possible to take a position on the target market also with a long-term timeframe, as required, for example for investments for social security purposes or CAP (Capital Accumulation Plans); Short selling: if one s own broker offers this service, in case through securities loan, it is possible to profi t from a decrease of the reference index also in a timeframe longer than one day. The ETF and ETC market - 5

8 Structured ETFs What they are Structured ETFs are UCITS i.e. funds or Sicav that may be traded in real time like shares, managed according to techniques aimed at pursuing returns that are not only related to the performance of the benchmark index, but which may also be aimed at: the protection of the portfolio value, albeit participating in the increases, if any, of the reference index (protection or protective put ETFs); participating in a more than proportional manner in the performance of an index (leveraged ETF); inversely participating in the movements of the reference index (short ETFs with or without leverage); more complex investment strategies such as, for example, the so-called buy-write or covered call strategy, which consists of a long position on the benchmark and the simultaneous sale of a call option on the index with an out of the money strike. What structured ETFs and ETFs have in common is the investment policy, which may be defi ned as passive in consideration of the fact that once the mathematical model on the basis of which the assets will be managed is defi ned, the discretionary power left to the manager is limited. Like for the ETFs, the units may be created and redeemed continuously by authorised participants, and this ensures that the market price is always aligned to the NAV of the fund. Main features The structured ETF allows: # to maximize the performance of each strategy: the structured ETFs enable the investor to join the benefi ts typical of an investment in ETF (passive strategy) with those of a dynamic management, thanks to a transparent method of allocation of the managed portfolio assets. ETFplus - 6

9 # to reduce the costs of one s own portfolio: the structured ETFs allow to access, at a low cost, more complex investment strategies than a simply tracking of the benchmark index. They are in fact subject to a low total annual commission (TER), applied automatically in proportion to the holding period, whilst the investor is charged no Entry, Exit and Performance fees. The investor must always include among the costs, the trading fees applied by his own bank/broker for the purchase and sale on the market. # to benefit from periodical proceeds: the dividends or interests that the structured ETF collects may be re-distributed periodically to the investors or permanently capitalized in the assets of the structured ETF. In both cases, the benefi ciary is only the investor. # to reduce the issuer s risk: the structured ETFs listed on ETFplus are, depending on the instrument, Mutual Investment Funds or Sicav (UCITS) and, therefore, are exposed to no insolvency risks. Investment modalities With structured ETF the investor may access directly and with one single purchase transaction, different strategies and risk profi les on the desired market with the transparency and liquidity ensured by the ETFplus market, taking advantage of investing: WITH LEVERAGE EFFECT and, therefore, fully exploiting the intraday movements of the markets both upward and downward; WITH AN INVERSE RELATION between the index performance and the performance of the ETF, relying on the so-called short ETF; WITH CAPITAL PROTECTION, facing, therefore, lower risks than those of the direct position on the benchmark index thanks to the structured ETFs with protection. The ETF and ETC market - 7

10 Exchange Traded Commodities What they are Exchange Traded Commodities (ETCs) are fi nancial instruments issued against a direct investment by the issuer in commodities or commodities derivative contracts. The price of an ETC is, therefore, directly or indirectly linked to the performance of the underlying. Similarly to ETFs, the ETCs: are traded on the Stock Exchange like the shares; passively track the performance of the commodity or commodity indices to which they refer thus being fully entitled to being included in the family of passive instruments. With ETCs investment opportunities are extended: the investor may take position on one single commodity (gold, oil, natural gas, sugar, soybean, zinc), while ETFs can t do it because they must ensure a certain degree of diversifi cation in compliance to UCITS III (Directive on Undertakings for Collective Investments of Savings). The ETCs, in fact, are not UCITS but they are rather securities without maturity issued by a vehicle company in relation to an investment in the commodity to which they refer or an investment in commodities derivative contracts entered into by the issuer with high standing international dealers. What assimilates ETFs and ETCs is the existence, for each class of securities, of a primary market and a secondary market. ETFplus - 8

11 The primary market, accessible exclusively by authorised participants, permits the subscription and redemption of the securities on a daily basis at the price of the offi cial reference market of the underlying commodity (the possibility is provided for certain ETCs to make the subscription also in kind, i.e. delivering to the issuer directly the commodity). The secondary market is represented by the Stock Exchange, where all the other investors may trade the ETCs for the price determined by the best bid and ask orders inserted on the trading book. The creation and redemption procedure on the primary market permits authorised intermediaries to make arbitrages, which cause that the price of ETCs on the secondary market is always constantly aligned to the market value of the underlying commodity as it happens for ETFs. Main features Commodities represent an important asset class for both institutional investors and retail investors, considering that an investment in commodities makes it possible: to protect one s own investments against the risk of infl ation; to improve the risk-return ratio and, therefore, the effi ciency of the portfolio given the low historical correlation with the equity and bond markets. Thanks to continuous trading of ETCs, the ETFplus market makes it possible for all investors to access the commodities market in a simple, transparent manner and with high liquidity. In synthesis, an ETC permits: # to access the commodities market directly: the ETCs replicate the performance of a single commodity or commodities indices, thanks to the direct investment by the issuing company in the commodity or commodity derivative contracts. In the latter event the ETCs enable investors to have an exposure similar to the one that would be obtained through a long position in futures contracts without leverage. The ETF and ETC market - 9

12 Exchange Traded Commodities # to remain constantly aligned to the performance of commodities: different from the position in futures, ETCs do not entail the need to reposition from one futures contract to another, require no margin, and do not entail any brokerage/replacement expenses of derivative contracts approaching maturity because these activities are already incorporated within the instrument. Finally, physically backed ETCs, enable investors to avoid the charges and the risks linked to commodities storage. # to obtain exposure to a total return: in the event of ETCs linked to the price of commodity futures contracts, the investor has access to a total return comprising three different components: - spot return: this is the return deriving from the fl uctuation of the price of the underlying commodity; - roll return (positive or negative): this is the return associated with selling near month futures contracts prior to expiry and reinvesting the proceeds in next month futures contracts, in order to maintain the position on the underlying. The roll return can be negative (contango) when the front month futures contract price is lower than the next month futures contract price, or positive (backwardation) in opposite event; - return of the collateral: this is the interest that is obtained from the investment of the collateral (the purchase of a future does not require, in fact, any investment other than the maintenance of a margin, which is, however, also remunerated). Finally, considering that a large part of commodities are handled in dollars, the value of investment will be positively or negatively affected by the performance of the EUR/USD exchange rate. # access the commodities market at a low cost: like for the ETF, the investor is charged no Entry, Exit and Performance fees, management fees are low and are applied in proportion to the time during which the security was held through a reduction in the quantity of the commodity to which one is entitled. Finally, like for the purchase of any other security on the market, only trading fees applied by one s own bank/broker must be considered. ETFplus - 10

13 Investment modalities The range of commodities replicated by the ETC is very broad and does not limit itself to single commodities, but extends to their indices and sub-indices. All this allows the investor, depending on his expectations and his propensity towards risk, to bet on the performance of an individual commodity and to obtain a well diversifi ed position on a basket of commodities purchasing: more ETCs on individual commodities (Aluminium, Coffee, Copper, Corn, Cotton, Gasoline, Gold, Heating Oil, Brent Oil, WTI Oil, Lean Pork, Live Cattle, Natural Gas, Nickel, Silver, Soybean Oil, Soybeans, Sugar, Wheat and Zinc); ETCs on indices linked to homogeneous baskets of goods (Agricultural Products, Energy, Cereals, Industrial Metals, Cattle, Oil, Precious Metals, etc.); ETCs on global commodities indices; ETCs on forward commodities indices. Like for the ETFs, thanks to the trading on the stock exchange, also the ETCs permit a broad fl exibility of use, causing them to be instruments suitable for any expectations on the evolution of the markets or needs of investors. They may be used, in fact, both for short-term trading, for the purpose of catching the movements of an individual session on the Stock Exchange, and for investments with a long time horizon, considering that ETCs have no maturity. Finally, if one s own intermediary so allows, they may be short-sold in order to profi t from a bearish trend or they may be bought with leverage effect. The ETF and ETC market - 11

14 ETFplus: Segmentation and microstructure Thanks to the ETFplus market, Borsa Italiana has created the ideal context for trading of ETFs, structured ETFs and ETCs, with the precise objective of: extending the investment possibilities of investors, offering a broad range of instruments, which adjust to different risk profi les and permit to increase the effi ciency level and the differentiation of the investment portfolio; protecting investors through the application of clear rules, having the purpose of ensuring high liquidity, low spreads and the utmost information transparency. Segmentation Instruments traded on the ETFplus market, even though they share the same operating mechanisms, show their own characteristics and peculiarities. For the purpose of facilitating the investor in the selection activity of those instruments, which better adjust to his risk-return profi le and his expectations, three segments are provided, which show the same trading modalities and which are possibly divided into classes: open-end index funds segment, divided into the following classes: class 1: ETF whose reference index is bond based class 2: ETF whose reference index is equity based open-end structured funds segment, divided into the following classes: class 1: structured ETFs without a leverage effect class 2: structured ETFs with a leverage effect ETCs segment. ETFplus - 12

15 Microstructure LIQUIDITY The liquidity of a fi nancial instrument is supported by the presence on the trading book of both bid and ask prices, with competitive spreads and high quantities offered. The liquidity of instruments traded on ETFplus is ensured by the constant presence on each instrument of: a specialist, which undertakes the obligations both in terms of minimum quantity to be exposed in bid and offer, and in terms of maximum spread between the bid price and ask price and with an obligation to restore quotation within 5 minutes in the event of total or partial hit on the book. Borsa Italiana monitors the performance of these obligations on a continuous basis; different liquidity providers which, even though they have no quotation obligations, display on their own account bid and ask prices supplying additional liquidity to the instruments. The ETF and ETC market - 13

16 ETFplus: Segmentation and microstructure TRADING HOURS The continuous trading of ETFs, structured ETFs and ETCs takes place non-stop from 9.05 AM to 5.25 PM (without opening and closing auction). The contracts are concluded through the automatic matching of bid and ask orders according to price/time priority criteria. During the continuous trading, orders may be inserted through one s own intermediary with price limit or without price limit and the modalities may be specifi ed, inter alia, of valid until cancellation and valid until specifi ed date. In order to ensure the proper operation of the market, as for the shares, maximum limits are fi xed to the fl uctuation of prices. A maximum limit is established to price variation of the orders inserted on the market compared to the control price (which corresponds to the reference price of the previous day), a maximum limit to price variation of the price of contracts again compared with the control price and, fi nally, a maximum limit to the variation of prices between two consecutive contracts. Such limits vary depending on the segment and the specifi c class (they are, for example, larger for structured ETFs and smaller for ETFs on bond indices). During the temporary suspension of trading, no input, amendment or cancellation of orders is allowed. Clearing of contracts is managed in Monte Titoli (the company for the centralized administration, clearing and settlement of the Borsa Italiana group S.p.A) on the third open market day after the execution of contracts, whose fi nal settlement is guaranteed by the Central Counterparty (Cassa di Compensazione e Garanzia). The minimum quantity that can be traded is one single share/ unit and, therefore, also with very small amounts it is possible to purchase the instruments listed on ETFplus. ETFplus - 14

17 Trasparency of Information Considering that a continuing fl ow of updated information represents a fundamental requirement for the guarantee of the proper operation of the market, Borsa Italiana requires that issuers make available to the market the following information: value of the NAV of the ETFs and structured ETFs, or the offi cial value of the ETCs; the creation basket, i.e. the portfolio of securities in exchange of which the shares of the ETFs may be created and redeemed; the number of outstanding units or shares for each ETF and ETC; the entitlement of the ETCs; for the structured ETFs, if provided: the protection and guarantee levels, the value of the multiplier and the cushion; the amount of any dividend, the ex date as well as the payment date. In addition to the above information, the statistics relating to the market, the prospectuses and the list of banks/investment companies trading ETFs and ETCs are available on Borsa Italiana web site in the section devoted to the ETFplus market. It is also provided that the issuers make available to the investors, through the traditional infoproviders, the instant value of the net assets (inav). The ETF and ETC market - 15

18 The publication of this document does not represent solicitation, by Borsa Italiana S.p.A., of public saving and is not to be considered as a recommendation by Borsa Italiana as to the suitability of the investment, if any, herein described. This document has not to be considered complete and it is meant for information and discussion purposes only. Borsa Italiana accepts no liability, arising, without limitation to the generality of the foregoing, from inaccuracies and/or mistakes, for decisions and/or actions taken by any party based on this documents. Trademarks Borsa Italiana and Borsa Italiana s logo, Expandi, IDEM, MOT, MTA, MTF, STAR, SeDeX, techstar, MIB 30, MIBTEL, MIDEX, MIBSTAR, ITEX, BIt Club, Academy, Bors@mat, MiniFIB, DDM, Euromot, Marketconnect, MCW Mercato dei Covered Warrant, MIB, NIS are owned by Borsa Italiana S.p.A. Trademark S&P is owned by The MCGraw-Hill Companies Inc. The above trademarks and any other trademark owned by the Borsa Italiana Group cannot be used without express written consent by the Company having the ownership of the same. Pursuant to article bis of the Italian Civil Code, Borsa Italiana S.p.A. is subject to direction and coordination functions by LSEG Plc. May Borsa Italiana. All rights reserved.

19 The ETF and ETC market - III

20 ETFplus - IV Borsa Italiana Piazza degli Affari, Milano Tel Fax info@borsaitaliana.it