2012 08 advent the abcs of etfs

7/31/2019 2012 08 Advent the ABCs of ETFs

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The ABCs of ETFsThe Growth, Challenges and Opportunities

of Exchange-Traded Funds

A Primer for Investment Managers with

a Lexicon of Terms

WHITEPAPER


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TABLE OF CONTENTS

[03] Whats Behind the Boom?

[06] In the Beginning.. .

[07] Not Your Fathers Mutual Funds

[08] Flavors of ETFs and Their Uses

[09] Leveraged ETFs: Flirting with Disaster?

[10] Challenges and Opportunities

[12] Lexicon: The Etymology of ETFs


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Few investment products have been as popularor as misunder-

stoodin modern times as exchange-traded funds (ETFs). Indeed,

given the passions these funds have evoked, ETFs have become Wall

Streets version of the Rorschach test. You can see in them pretty muchanything you want, depending on your point of view.

To legions of loyal investors, exchange-traded funds and exchange-

traded products (ETPs), a very similar variant, are the perfect invest-

menta fixed basket of stocks or other securities that provide the

diversification of mutual funds, but with lower expense ratios, greater

transparency and more tax advantages. But to critics, the newer gener-

ation of ETFs to roll out of Wall Streets laboratories are potential

weapons of mass financial destructioncomplex financial instruments

that are capable of triggering another financial crisis. And to regulators,

who approved the first ETFs in 1989, exchange-traded funds look

like...well, amorphous inkblots that require closer scrutiny. But more

on that later.

These criticisms and uncertainties havent dampened investors ardor

for exchange-traded funds, though. Over the past decade, ETFs have

evolved from a low-cost alternative to index funds to a phenomenon

that, at $1.35 trillion,1 is quickly approaching the $2 trillion held by all

hedge funds.2 And yet this may be just the first act for ETFs: consult-

ants McKinsey & Company recently predicted that the assets held

globally in ETFs could rise to between $3.1 trillion and $4.7 trillion

by 2015. As McKinsey noted, in the last decade no other significant

segment of the US asset management industry has grown as quicklyand consistently as ETFsnot managed accounts, IRAs or even the

booming defined contribution market. ETFs are clearly here to stay.3

Whats Behind the Boom?Whats driving the rush into exchange-traded funds? For one, the lack-

luster performance of the markets over the past decade has prompted

many investors to look for lower-cost alternatives to mutual funds, and

theres no denying the cost advantages of ETFs. The average expense

ratio for ETFs tracking the Standard & Poors 500 stock index is 0.32

percentor nearly half the average 0.6 percent expense ratio for tradi-

tional S&P 500 index funds.

advent.com 03

This communication is provided byAdvent Software, Inc. for informationalpurposes only and should not be con-strued as, and does not constitute,legal advice on any matter whatsoever

discussed herein.

1 ETP Landscape: Industry Highlights, BlackRock Advisors, January 2011.

2 Hedge Fund Investors Rotate into Macro, Arbitrage Strategies for 2012, HedgeFund Research Inc., 19 January 2012.

3 Onur Erzan, Ogden Hammond and Juan Banet, The Second Act Begins for ETFs:A Disruptive Investment Vehicle Vies for Center Stage in Asset Management, McKin-

sey & Company, August 2011.

In the last decade no other

significant segment of the

US asset management industry

has grown as quickly and consis-

tently as ETFsnot managed

accounts, IRAs or even the boom-

ing defined contribution market.

ETFs are clearly here to stay.


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In fixed income, the gap is even greater: The average expense ratio for

ETFs tracking the Barclays Capital US Aggregate Bond index is 0.14

percentjust a third of the 0.42 percent in annual expenses charged

by comparable mutual funds. This difference in costs explains a large

part of the performance gains that exchange-traded funds haveenjoyed in recent years. According to McKinsey, S&P 500-based ETFs

earned an average 1.89 percent return annually between 2007 and

2010, versus the 1.57 percent for comparable mutual funds. And for

exchange-traded funds tracking the Barclays Capital Bond index, the

performance gap was even larger: a 5.51 percent return for ETFs track-

ing the Barclays Capital index versus 4.72 percent for comparable

mutual funds during the same period.4

WHITE PAPER

4 Onur Erzan, Ogden Hammond and Juan Banet, The Second Act Begins for ETFs:A Disruptive Investment Vehicle Vies for Center Stage in Asset Management,

McKinsey & Company, August 2011.

200

400

600

800

1,000

Assets (US$bn) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Oct-11

ETF total 74.3 104.8 141.6 212.0 309.8 412.1 565.6 796.7 711.1 1,036.0 1,311.3 1,386.1

ETF equity 74.3 104.7 137.5 205.9 286.3 389.6 526.5 729.9 596.4 841.6 1,053.8 1,094.4

ETF fixed income 0.1 0.1 4.0 5.8 23.1 21.3 35.8 59.9 104.0 167.0 207.3 251.7

ETF commodity 0.0 0.1 0.3 0.5 1.2 3.4 6.3 10.0 25.6 45.7 35.21

Other ETPs total 5.1 3.9 4.1 6.3 9.3 15.9 32.5 54.6 61.2 119.7 171.3 191.4

# ETFs 92 202 280 282 336 461 713 1,170 1,595 1,944 2,460 2,950

# Other ETPs 14 17 17 18 21 63 170 371 625 750 1,083 1,202

0

1,200

1,400

1. ETPs with commodity producers equity exposure have been reclassified this month from the commodities category into global equity.Note: CAGR = Compound Annual Growth Rate. AUM = Assets Under Management. Global ETP flows are approximated by combining flows available for the UnitedStates, Europe, Canada and Latin America (excludes Asia, Middle East and Africa which are not available). Israel ETP assets and shares outstanding on Chinas ETFs areas at end of Septembe r 2011. All other data as at end of October 2011.Source: BlackRock Investment Institute, Bloomberg.

Assets US$bn # products

500

1,000

1,500

2,000

2,500

0

3,000

3,500

s4HEYEAR#!'2FOR%40!5-ISUSINGONLYMONTHSFOR&OR%4&SOF!5-ISINVESTEDINEQUITYPRODUCTSISINVESTEDINFIXEDINCOMEPRODUCTSANDISINVESTEDINCOMMODITYPRODUCTS/THER%40SEXCLUDING%4&SAREPRIMARILYINVESTEDINCOMMODITIES

Global ETP multi-year asset growth


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Whats more, the proliferation of exchange-traded funds has enabled

investors to gain exposure to not only exotic countries or narrow indus-

try subsectors but also to commodities such as gold, oil, natural gas

and copper that were previously too impractical and expensive to buyoutright. Today, via ETFs an investor can take stakes in everything from

copper to clean energy to the Czech Republic. And since ETFs trade

on the major exchanges, investing is as easy as buying a stock. And it

comes as no surprise that some financial advisors now create client

portfolios entirely composed of ETFs. We can have more precise asset

allocation at very low cost, Justin Urquhart-Stewart of London-based

Seven Investment Management told The Economist.5

As ETFs have grown, so too have the ways that theyre used. In recent

years, more and more of the demand has come from hedge funds that

view ETFs as a cost-efficient way to move in and out of different mar-

kets rapidlysometimes as part of complex algorithmic trades and

almost always with lots of leverage. To satisfy this demand, some ETF

firms have rolled out a new breed of exchange-traded funds whose

portfolios consist not of a basket of stocksbut simply of derivatives

or swaps positions with an investment bank as the counterparty. By

using derivatives, these so-called leveraged ETFs effectively allow

investors to make bets of two or three times the size of their invest-

ment, without having to borrow on margin.

Perhaps not surprisingly, its the leveraged ETFs that top the perform-

ance charts. Case in point: the Direxion Daily 20 Year Plus Treasury Bull

3x ETF, an exchange-traded note, was up 109.2 percent in 20116more than double the return for the best-performing mutual fund

during the same period.

But the popularity of leveraged and synthetic ETFs has given rise to

critics who argue that some of the recent market downturnsincluding

the flash crash of May 2010were triggered not by high-frequency

traders, as was widely assumed at the time, but by hedge funds dump-

ing leveraged ETFs. Theyve turned the market into a casino on

steroids, Douglas A. Kass, founder and president of Seabreeze Part-

ners Management, told The New York Times. They accentuate the

moves in every directionthe upside and the downside.7 BlackRockCEO Larry Fink was more succinct in his assessment of leveraged and

inverse ETFs at a September 2011 conference, declaring that, We

wont play in themwe think theyre toxic.8

advent.com 05

5 Trillion-dollar Babies: A Fast-Growing Asset Class, The Economist, 21 January 2010.

6 Mark Gongloff, Top-Performing ETFs of 2011: Apocalyptic Bets Paid Off Well,The Wall Street Journal, 6 January 2012.

7 Andrew Ross Sorkin, Volatility, Thy Name Is E.T.F., The New York Times,10 October 2011.

8 Jackie Noblett, Leveraged ETF Sales Shrug Off Volatility Fears, The FinancialTimes of London

, 19 September 2011.

Today, via ETFs an investor

can take stakes in every-

thing from copper to clean

energy to the Czech Republic.

And since ETFs trade on the

major exchanges, investing is as

easy as buying a stock.


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WHITE PAPER

Regulators have taken notice as well. In March 2011, the US securities

regulator, the Securities & Exchange Commission (SEC), imposed a

moratorium on new ETFs that used derivatives while it studied the

issue further.9

What the SEC will ultimately decide is anyones guess,though Soo Kobberstad, a senior analyst for Moodys Investor Services,

predicted that the agency will limit the use of derivatives as well as the

amount of leverage that funds can take on.10 But that may serve only

as a temporary setback for a product that has certainly eclipsed the

expectations of the pioneers who rolled out the first ETFs a little more

than 20 years ago.

In the Beginning...The first exchange-traded funds were created in 1989 in the form of

Index Participation Shares (IPS), which were designed to be a more tax-efficient clone of the popular S&P 500 index funds. The SEC gave its

blessing for the American Stock Exchange and the Philadelphia Stock

Exchange to trade IPSs, but the Chicago commodities exchanges sued

to halt trading and won, arguing that the products were futures and not

securities. But the success of a similar product in Toronto that repli-

cated major Canadian indices prompted US promoters to try again

with a structure that would pass muster with regulators and the courts.

And in 1993, the American Stock Exchange successfully launched the

Standard & Poors Depositary Receipts by structuring it as a unit invest-

ment trust. Better known as SPDRs, or Spiders, they became such a

hit that the Amex quickly rolled out several variants.

Top 10 ETF Sponsors ($ billions)

Rank Sponsor Assets Market Share 2011 Net Flows

1 BlackRock iShares $599.1 39.3% $ 2.3

2 State Street Global Advisors 270.3 17.7 21.2

3 Vanguard 170.7 11.2 22.2

4 PowerShares/Deutsche Bank 59.4 3.9 4.0

5 Db x-trackers/db ETC 44.1 2.9 ( 6.1)

6 Lyxor Asset Management 34.9 2.3 (18.5)

7 ETF Securities 24.8 1.6 ( 1.4)8 Van Eck Associates Corp 23.5 1.5 3.5

9 ProShares 23.1 1.5 ( 0.5)

10 Nomura Asset Management 18.4 1.2 1.8

Data: BlackRock Investment Institute, Bloomberg

9 SEC Staff Evaluating the Use of Derivatives by Funds, Securities & ExchangeCommission, Release 2010-45, 25 March 2010.

10 Yali NDiaye, Moodys: SEC Proposal to Likely Limit Funds Derivative Use as

Investment,Market News International

, 12 September 2011.


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advent.com 07

Sensing a lucrative new revenue opportunity, other firms quickly fol-

lowed suit. In 1996, Barclays Global Investors jumped into the game

when it introduced the World Equity Benchmark Shares, a series of

funds that tracked the 17 different MSCI country indices. In 1997, StateStreet Global Advisors launched a series of ETFs that followed the nine

sectors of the S&P 500, and Barclays countered with the iShares line as

well as the first ETFs in Europeand the game was on. Those firms

have reaped the benefits of being the first movers. Today, the three

largest ETF managersState Street, Vanguard and BlackRock (which

acquired Barclays Global Investors in 2009)control roughly two-thirds

of the ETF market, and theyve used that critical mass to drive fees

down below what new entrants can match. To wit: State Streets $90.9

billion SPDR fund, which mimics the S&P 500, has a total expense ratio

of just 0.15 percent.

Coincidence or not, exchange-traded funds have steadily gained in

popularity since their introduction, as returns from other securities have

been harder for investors to come by. In the past decade, ETF assets

have grown an average of nearly 30 percent a year. There are now 193

firms around the world offering 4,211 different types of exchange-

traded products that allow investors to do everything from short the

yen to go long on cocoa. Investors can buy leveraged ETFs that provide

outsized gains (or losses), as well as inverse ETFs that move counter

to an indexand for good measure, even leveraged inverse ETFs!

Not Your Fathers Mutual FundsAt first blush, ETFs might appear to be a variation of the closed-end

mutual fund, which trades throughout the trading day at prices that

may be more or less than its net asset value. Thats true, but exchange-

traded funds have as much in common with stocks as they do with

mutual funds, and heres why: From the time that an ETF sponsor sells

the first units, investors buy and sell exchange-traded funds over a

listed exchange or through one of the participating electronic commu-

nications networks (ECNs) such as Arca. Moreover, investors in ETFs

can execute all of the same moves they do with stocks, including mar-

ket orders, limit orders, stop orders, short sales and margin purchases.

Exchange-traded funds have

steadily gained in popularity

since their introduction, as returns

from other securities have been

harder for investors to come by.


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Top 10 ETFs ($ billions)

Rank Sponsor Ticker Assets

1 SPDR S&P 500 SPY US $95.3

2 SPDR Gold Trust GLD US 63.03 Vanguard MSCI Emerging Markets VWO US 41.9

4 iShares MSCI EAFE Index Fund EFA US 36.6

5 iShares MSCI Emerging Markets Index Fund EEM US 32.6

6 iShares S&P 500 Index Fund IVV US 26.2

7 PowerShares QQQ Trust QQQ US 25.6

8 iShares Barclays TIPS Bond Fund TIP US 22.2

9 Vanguard Total Stock Market ETF VTI US 19.5

10 iShares iBoxx $ Investment Grade Corp Bond IWM US 17.2

Data: BlackRock Investment Institute, Bloomberg

To fill the trades made by investors, market makers are constantly mak-ing exchanges with the investment firm that launched and now spon-

sors the ETFeither swapping a basket of securities that comprise the

ETF or vice versa. These exchanges are known as in-kind transfers

and arent considered a taxable event by the US tax collector, the Inter-

nal Revenue Service. Thats in contrast to mutual funds, whose man-

agers may need to sell securities to raise cash for redemptionsand in

the process, create a possible capital gain on which shareholders

must pay taxes. With ETFs, its the investorand investor alonewho

decides when to sell and take any capital gains. This control makes

ETFs far more attractive to many tax-sensitive investors.

Flavors of ETFs and their UsesLike their second cousins, traditional mutual funds, ETFs come in

several different formats:

Open-end ETFs. This is the most popular structure among spon-

sors, given that open-end ETFs are legally allowed to own deriva-

tives (and are allowed to loan out their securities to short sellers,

which creates an additional income stream for the sponsors). Open-

end ETFs pay quarterly distributions, which can be reinvested.

ETF Unit Investment Trusts (UITs). Some of the first ETFs were

formed as unit investment trusts, which are chartered for a set

period of time (usually 125 years). But ETF UITs cant invest in

options or futures, which has limited their popularity among institu-

tional investors and hedge funds.

Closed-end ETFs. These funds issue a set number of shares at

launch. The funds manager can only sell more shares by giving the

initial shareholders the right to buy new common shares at preset

prices, which are usually discounted to boost participation.

Investors in ETFs can exe-

cute all of the same movesthey do with stocks, including

market orders, limit orders, stop

orders, short sales and margin

purchases.


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advent.com 09

Grantor Trusts. These funds are designed to follow an index at

inception, but dont necessarily adjust to any later changes in the

composition of the index. With Grantor Trusts, you can own the

basket of stocks as a single assetor unbundle them to own eachof the underlying stocks. That enables you to trade the stocks indi-

vidually to meet your tax or investment goals. The best-known ETF

Grantor Trusts were the 17 different HOLDRs created by Merrill

Lynch, but which ceased trading in December 2011.

Actively Managed ETFs. For now, actively managed ETFs can only

be found in Europe, since the SEC hasnt approved them in the

United States. One of the sticking points between the SEC and ETF

sponsors is how quickly the sponsors must announce any changes

to their portfolio. While managers of active ETFs in Europe disclose

portfolio changes to market makers two days laterand to

investors, two months laterthe SEC has insisted on more timely

disclosure. That isnt sitting well with US mutual fund managers,

who are accustomed to disclosing their holdings only twice a year.

Today, exchange-traded funds are used by investors for many different

reasons: While small investors view them as a low-cost alternative to

more expensive sector funds, institutions and hedge funds sometimes

use ETFs to quickly equitize unallocated client fundsmaintaining

market exposure when, for instance, part of a clients existing portfolio

is sold to harvest a tax loss. Investment professionals also use exchange-

traded funds as a legal way of avoiding the wash sale rule, a US tax

law that prohibits taxpayers from claiming an investment loss if theypurchase the same investment 30 days before or after the sale date.

But given the plethora of exchange-traded funds, investors can easily

find comparable ETFs that provide the desired exposurewithout

jeopardizing their tax loss.

Leveraged ETFs: Flirting with Disaster?For all of their popularity among investors, exchange-traded funds

have come under attack by some market pros and regulators who fear

that these instruments are creating more risk and instability in the

markets. A key concern among critics is liquidity, since sponsors have

sold billions of dollars of ETFs that are invested in relatively illiquid

markets such as Japanese real estate or Czech stocks. While shares in

these ETFs can be easily sold, the assets backing them may not be as

liquidand when the bids are all on one side, that can cause the mar-

kets to lock up. In this respect, its worth recalling that during the so-

called flash crash in May 2010, the Dow Jones Industrial Average

briefly plunged 1,000 points as liquidity disappeared.

For all of their popularity

among investors, exchange-

traded funds have come under

attack by some market pros and

regulators who fear that these

instruments are creating more risk

and instability in the markets.


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When regulators began cancelling trades made at unusual prices, they

discovered that as much as 70 percent of those trades were in ETFs

which was far above their true weighting in the markets. It is these

derivatives and not the phenomenon known as high frequency tradingcommonly critiqued as contributing to the flash crash of May 6,

2010that pose serious threats to market stability in the future,

Harold Bradley and Robert E. Litan of the Kauffman Foundation wrote

in a controversial report published in November 2010.11 Regulators

caution that it could happen again. In an April 2011 working paper, the

Bank for International Settlements warned that any reassessment by

investors of the liquidity of ETFs could have significant implications for

the normal functioning of financial markets.12

To meet investor demand for illiquid securities such as emerging mar-

kets or commodities, ETF providers also have turned to synthetic

replication techniques and derivatives sold by the investment banks.

In many market segments, there is a lot of money chasing a relatively

small pool of hard financial assets, Daniel Awrey, a lecturer in law and

finance at Oxford University told The Financial Times of London. This

helps explain the demand for synthetics.13 But critics say this approach

repeats the same risk that triggered the last financial crisis: counter-

party risk. Synthetic ETFs, which comprise roughly 40 percent of

Europes $292 billion market, expose investors to the fortunes of the

bank that issued them, not just the markets natural forces.

Challenges and OpportunitiesExchange-traded funds have exploded in popularity, and its reason-

able to believe that ETFs will continue to grow in coming years. The

trend in Europe and Australia toward fee-based advisory models

where advisers are compensated either via flat fees or on total assets

under management rather than with commissionsaugers well for

low-cost products such as ETFs. In the US, the SECs proposed limits on

the so-called 12b-1 marketing fees that mutual funds paid advisers

as incentives to distribute their products should also help level the

playing field for ETFswhose bare-bones business model leaves no

room to pay such fees. And then theres the vast 401(k) retirement mar-ket, which remains largely untapped territory for the ETF industry.

11 Harold Bradley and Robert E. Litan, Choking the Recovery: Why New GrowthCompanies Arent Going Public and Unrecognized Risks of Future Market Disrup-tion, Ewing Marion Kauffman Foundation, 12 November 2010.

12 Srichander Ramaswamy, Market Structures and Systemic Risks of Exchange-Traded Funds, Bank for International Settlements Working Papers, April 2011.

13 Tracy Alloway and Izabella Kaminska, UBS loss throws light on synthetic

problem,The Financial Times of London

, 4 October 2011.


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advent.com 11

But its safe to say that theres more the ETF industry can do to ensure

that the next decade is just as prosperous as the last. In the beginning,

the calling card for ETFs was their simplicity, tradeability, transparency,

and their cost advantages over traditional mutual funds. But the major-ity of the ETFs that have been introduced in recent years are more

complex, more opaque, and potentially riskier than their predecessors.

For their part, the backers of leveraged ETFs say the fears that these

products pose systemic risks are overblown. Leveraged funds, they

point out, have roughly $40 billion in assets, which is less than 3 per-

cent of all ETF assets. Synthetic ETFs represent another $140 billion in

assets. Together, thats $180 billionwhich is roughly 12 percent of all

ETFs. By contrast, subprime mortgages represented more than 60 per-

cent of the massive wave of foreclosures in 2007 that helped trigger

the financial crisis the following year.14 Regulators, says WisdomTree

Investments CEO Jonathan Steinberg, are looking for a scapegoat for

the volatility.15

The challenge for regulators and the industry alike is to restore the

transparency that was the hallmark of these products, so that investors

are very clear on what theyre buying. That means fund names that tell

prospective investors right away whether an ETF contains derivatives or

any other synthetic replication techniques. The collateral that the ETF

providers are required to hold should be disclosed as welland should

consist of the same securities and assets in the fund.

Last, ETF sponsors must make sure they have the people, processes

and technology that will be needed going forward. Up to now, more

than a few ETF sponsors were able to grow just by picking the low-

hanging fruit. That easy growth enabled many sponsors to coast along

with non-standard technology, undocumented processes, undefined

roles and risk controls that were created on the fly. But the competition

has gotten tougher, and only the players with a focused strategyand

the ability to execute itwill thrive going forward. Which means that,

much like the patient looking at an inkblot, the ETF industry can divine

whatever it chooses in its future.

14 Sam Khater, The Role of Subprime Loans in Foreclosure Volumes, The Market-Pulse, CoreLogic, 18 January 2012.

15 Jessica Toonkel, WisdomTree CEO defends leveraged ETFs, Reuters,

12 September 2011.

ETF sponsors must make

sure they have the people,

processes and technology that

will be needed going forward. Up

to now, more than a few ETF

sponsors were able to grow just

by picking the low-hanging fruit.


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Lexicon: The Etymology of ETFsThe explosive popularity of ETFs has introduced a whole new terminol-

ogy into the trading world. Here is a guide to some of the most com-

mon terms in ETFs:

BasketA bundle or group of securities. The securities within an ETF

are sometimes referred to as a basket.

Creation UnitThe smallest block of shares in an ETF that investors

or more commonly, fiduciariescan purchase or redeem directly from

the fund sponsor at the ETFs net asset value. Creation units are usually

transacted in increments of 50,000 shares, which limit their market to

large institutions and other authorized participants. Instead of cash, the

seller of a creation unit would receive a basket of securities that corre-

sponds to the portfolio holdings in a particular ETF. This in-kindtransfer process is unique to ETFs and doesnt create tax consequences

for the seller.

Enhanced ETFsFunds that were designed around an index but dont

intend to track it verbatim. The most common versions of Enhanced

Funds are Leveraged ETFs and Short ETFs.

Exchange-Traded Note (ETN)ETNs are unsecured debt securities

that pay a return tied to the performance of a single security or index.

ETNs can be traded before maturity on an exchange, but investors that

hold their ETN to maturity receive a cash payment calculated from the

initial trade date to the maturity date (minus the annual expense ratio).

ETNs usually dont pay a dividend or annual coupon and they have

maturity dates that can range up to 30 years. One issue is that ETNs

are subject to counterparty risk, meaning that the creditworthiness of

the sponsor can affect the notes final return and value.

Grantor TrustAn ETF that from inception follows an index but

remains static and may not reflect any changes in the composition of

the underlying index. The type of fund structure allows investors to

retain their voting rights on the underlying securities within the fund.

HOLDRs are structured as Grantor Trusts.

Index Participation SharesETFs were born in the form of Index

Participation Shares, a simple proxy for the S&P 500 Index that began

trading on the American Stock Exchange and Philadelphia Stock

Exchange in 1989. The Chicago Mercantile Exchange and Commodity

Futures Trading Commission sued to stop their trading, arguing that

they were futures contracts and hence, required by law to trade on a

futures exchange regulated by the CFTC, and not a stock exchange. A

federal court in Chicago agreed and IPS trading was shut down.


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advent.com 13

Indicative ValueA measure of the intraday net asset value (NAV) of

an ETF, which provides an updated measure of the value of the fund

based on its assets less its liabilities. The NAV for an ETF is usually cal-

culated at the end of each trading session, but the Indicative NAVprovides a real-time view of this value. Note that the Indicative NAV

is not the price at which you can purchase an ETF, and may deviate

slightly from the real NAV due to such factors as supply and demand.

The symbol for most indicative values is the ETF ticker symbol with

an .IV (ETF.IV)

iSharesA group of ETFs advised and marketed by BlackRock. iShares

are structured as open-end mutual funds.

Leveraged ETFAn ETF that uses debt and financial derivatives to

magnify the returns of an underlying stock, bond or commodity index.

Most leveraged ETFs attempt to duplicate daily index returns by two orthree times, and short leveraged ETFs attempt to do the same in the

opposite direction. Leveraged ETFs are available for most indexes,

including the NASDAQ 100 and the Dow Jones Industrial Average.

Qubes (QQQ)An ETF that tracks the tech-heavy NASDAQ 100

index. The nameand better-known nickname (Qubes)comes from

the ETFs ticker symbol, QQQ. Qubes are structured as unit investment

trusts.

Short ETFsAlso known as Inverse ETFs or Bear ETFs, these

funds use various derivatives to deliver the opposite or inverse per-

formance of a particular indexwith the intent to profit from a decline

in the value of the underlying benchmark. Investing in these types of

funds is akin to holding various short positions, except that Short ETFs

do not require investors to hold a margin account, as is the case for

investors who enter into short positions.

SPDRsA group of ETFs (managed by State Street Global Advisors )

that track the S&P 500 and other stock, bond and commodity indices

and sectors. The initial SPDR Trust, Series 1, was structured as a unit

investment trust, but Select Sector SPDRs are open-end funds.

Unit Investment TrustA common form of ETFs that requires the ETFsponsor to create an exact duplicate of the underlying index, with no

use of derivatives. This type of fund doesnt reinvest dividends, but

instead pays them out to shareholders via a quarterly cash distribution.

That could result in an ETF that sometimes deviates from the exact

composition of an index. The best-known examples include SPDRs

and QQQs.


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