exchange traded funds - a new face of investment in india- by deepak

Exchange Traded Funds

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“Exchange Traded Funds

– A New Face of

Investment in India”

By

DEEPAK SINGH

Financial Research Analyst (Markit)

&

Final Semester PGDM Student

INSTITUTE OF MARKETING AND MANAGEMENTMarketing Tower, B-11, Qutub Institutional Area,

New Delhi-110016


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Exchange Traded Funds – ‘A new face of investment in India’ is my attempt to

gather maximum possible information at one place. This report is based on

secondary research from websites and newspapers. I have tried to cover basics of

Exchange Traded Funds (ETFs) as well as brief introduction of ETFs in Indian

Financial Market. Exchange Traded Funds are well established in international

market, but in India it is in its initial stage.

This report is based on the performance of Exchange Traded Funds latest by May

& August 2008.

This is a wide topic and it is not easy to touch all the aspects of Exchange Traded

Funds in detail. If any one has any additional and important information

regarding ETFs please send it at my email ID, I would appreciate your precious

help.

Thank you,

Deepak [email protected]@gmail.com


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S.No. TABLE OF CONTENT Page No.

1) Synopsis 5

2) Specific Objectives 7

3) Research Methodology 8

4) Introduction of Exchange Traded Funds 10

5) History of Exchange Traded Funds 11

6) Types of ETFs Available in the market 12

7) ETFs better than Mutual Funds 14

8) Comparison of ETFs v/s Mutual Funds 16

9) Advantages of ETFs 17

10) How an ETF Comes to Market 21

11) Understanding the Creation/Redemption process 24

12) Risks associated with ETFs 30

13) Families/Issuers of ETFs 34

14) ETF performance globally 35

a) Performance by Market Cap 42

b) Performance by Style 43

c) Performance by Sector 44

15) ETF market 5 years down the line 48

16) Exchange Traded Funds in India 49

a) Nifty BeEs 52

b) Liquid BeEs 56

c) Junior Nifty BeEs 61

d) UTI Sunder 64

e) Bank BeEs 65

f) PSU Bank BeEs 67

g) Kotak PSU Bank 69

h) Kotak Sensex ETF 70

i) Quantum Index fund (QNIFTY) 71

j) RELBANK 72


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17) Gold Exchange Traded Funds in India 73

a) Gold BeES 82

b) UTI Goldshare 83

c) KotakGold 85

d) RELGOLD 86

e) Quantum Gold ETF 87

18) Road blocks in Indian Market 88

19) Performance of Indian ETFs 93

20) Suggestions from institutional investors 98

21) 10 best buy ETFs 99

22) Limitations of Study 101

23) Appendices 102

24) Refrences 111


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Synopsis

Investment is the most common word of present era with a large number of

investment options available in the financial market. Equity (shares), government

bonds, corporate bonds, bank fixed deposits etc. are the most widely known

investment options. Exchange Traded Funds (ETFs) are new among these

investment options especially in Indian financial world. Globally, ETFs have opened

a whole new panorama of investment opportunities to retail as well as institutional

money managers. First Exchange Traded Fund was started in 1993. They enable

investors to gain broad exposure to entire stock markets in different countries and

specific sectors with relative ease, on a real-time basis, and at a lower cost than many

other forms of investing.

An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX

Nifty or BSE Sensex etc. Exchange Traded Funds are essentially index funds that are

listed and traded on exchanges like stocks. The ETF's trading value is based on the

net asset value of the underlying stocks that it represents. ETFs are a recent

innovation in the world of investing. ETFs are a special kind of security that grants

you ownership over a collection of individual stock certificates. ETFs provide all the

facilities that a share (Equity) has like intraday trading, purchase on margin, sold

short etc.

Over the past five years, the ETF universe has exploded. The number of ETFs in the

U.S. has grown from 130 to 646; the number of domestic issuers has increased from

five to 23; assets under management have increased from $101.6 billion to $620.5

billion. [These numbers compare the end of 2002 with the end of 2007.]

Exchange Traded Funds in India listings include gold, silver and currencies. Assets of

India’s exchange-traded funds (ETFs) increased by more than six times in the past

one and a half years, aided by the India growth story. Their assets under

management increased to Rs.63.77billion as on September 30, 2007, from Rs.8.69

billion as on March 31, 2006. Most ETFs in India are index funds. Notable among

them are Nifty Benchmark Exchange Traded Scheme (BeES), Bank BeES, and Liquid

BeES. Recently, several fund houses also launched gold funds in the form of ETFs.


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Till 2006-07 we had only 6 ETFs in Indian market based on Nifty and banks now we

have 15 ETFs. 2007-08 was the year of gold ETFs in India most of the gold ETFs

came to the Indian market during third and fourth quarter of the financial year

2007-08. Unfortunately during this year US and other big economies were badly

suffered because of subprime crisis and after that depreciation of US$ then rise in

the oil prices, high inflation which has its impact on India economy also and

ultimately affected all the ETFs available in the market. Despite sluggish

performance of equity market gold ETFs were able to perform better than other

investment instruments.

Even in the downward movement and strongly negative sentiments of the financial

market ETFs have performed relatively better than stocks market. When analyzed

category wise, the maximum returns were delivered by the Gold ETFs, a huge 25%

return per annum.

Performance of different investment options: (M O N D A Y , A U G U S T 1 1 , 2 0 0 8 )

Annual Return

Gold ETF 25.00%

S&P CNX Nifty 12.63%

Sensex 12.46

Equity FMCG 11.72

Equity banking 11.49%

BSE Small Cap 10.73%

Sectoral fund categories (Technology and Auto) have delivered negative returns to

the tune of 15.38% and 14.88% respectively.

Indian market has huge potential and will be open to welcome more ETFs as soon as

this negative phase recovers. Only road blocks that I see in Indian market is high

volatility, no track record and complex economic rules and regulations of regulatory

authorities SEBI and RBI. One more ETF that will track the performance of the silver

is in the pipeline and waiting for the approval form SEBI.


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SPECIFIC OBJECTIVES

1. TO STUDY THE EXCHANGE TRADED FUNDS AND THEIR CREATION

PROCEDURE FOLLOWED BY CONCERNED INSTITUTIONS

2. TO EVALUATE DIFFERENT FAMILIES OF ETFs ON THE BASIS OF

THEIR PERFORMANCE

3. TO EXPLORE THE POSSIBILITIES OF ETFs IN INDIAN FINANCIAL

MARKET AND STUDYING THE ROAD BLOCKS WHICH MAY EMERGE

DURING ITS APPLICABILITY


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RESEARCH METHODOLOGY

This thesis project report is wholly based on intensive secondary research and

personal discussions with financial research analysts. Objectives of this report

were successfully executed with the help of secondary data available on

magazines, newspapers and websites.

The data collection and data analysis is done with the help of following methods

1. Data collection:

Mostly data was collected through secondary sources such as Journals, Corporate

reports, News papers and related websites (Bloomberg, Reuters, and Stocks

Exchanges etc).

2. Data analysis:

Data classification and analysis is being done with the help of various statistical

tools such as graphs, tables and charts such as pie charts, bar charts, area charts

etc.


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EXCHANGE TRADED FUNDS

Exchange Traded Funds are essentially index funds that are listed and traded on

exchanges like stocks. Until the development of ETFs, this was not possible before.

Globally, ETFs have opened a whole new panorama of investment opportunities to

retail as well as institutional money managers. They enable investors to gain broad

exposure to entire stock markets in different countries and specific sectors with

relative ease, on a real-time basis, and at a lower cost than many other forms of

investing.

An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX

Nifty or BSE Sensex. The ETF's trading value is based on the net asset value of the

underlying stocks that it represents. Think of it as a mutual fund that you can buy

and sell in real time at a price, which changes throughout the day.

ETFs are a recent innovation in the world of investing. ETFs are a special kind of

security that grants you ownership over a collection of individual stock certificates.

ETFs are approved by the SEC and are then available to the public as investing

vehicles.


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HISTORY OF EXCHANGE TRADED FUNDS:

The Origination of the Investment Company Concept

1893: First closed-end fund is started in Belgium.

1924: First open-end mutual funds are established in Boston.

1961: First tax-free unit investment trust is offered.

1976: First retail index fund is introduced.

1993: First exchange-traded fund shares are issued.

Sources: Investment Company Institute, Closed-End Fund Association

ETF Assets

(Billions of dollars)

World wide popularity of ETFs

ETFs, baskets of securities that are designed to track indices and trade like stocks,

have been the hottest investment vehicles of recent years and are especially popular

among affluent investors. Assets held within ETFs have increased 30 per cent to

$559bn in the past year, according to the Investment Company Institute, the

industry body.


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Types of ETFs Available for Purchase

On broad basis ETFs are of Two Types:

1. Closed-End ETFs

2. Index ETFs

Closed-End ETFs: Like a traditional mutual fund, a Closed-End ETF is an

investment company that pools the assets of its investors and uses professional

managers to invest the money to meet clearly identified objectives, such as current

income or capital appreciation. However, unlike a mutual fund, a Closed-End ETF

issues a fixed number of shares through an initial public offering, and lists those

shares on a national stock exchange such as the New York Stock Exchange (NYSE) or

the American Stock Exchange (AMEX). Investors who wish to buy or sell fund shares

do not purchase or redeem directly from the fund - rather, they buy or sell fund

shares on the stock exchange in a process identical to the purchase or sale of any

other listed stock.

Index ETFs: Like a traditional mutual fund, an index ETF is a investment structure

that pools the assets of its investors and uses professional managers to invest the

money to meet clearly identified objectives, such as current income or capital

appreciation. Unlike a mutual fund, an index ETF is created when an institutional

investor deposits securities into the fund in return for creation units. In return for

the deposit, the institutional investor receives a fixed amount of shares, some or all

of which may be traded and priced throughout the day on a stock exchange such as

the American Stock Exchange (AMEX). Retail investors who wish to buy or sell fund

shares do not purchase or redeem directly from the fund - rather, they buy or sell

fund shares on the stock exchange in a process identical to the purchase or sale of

any other listed stock. All the strategies associated with stocks, such as market

orders, limit orders, stop orders, short sales, and margin buying can be used in the

purchase and sale of index ETFs.


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Kinds of Index Exchange Traded Funds:

There are ETFs that track almost every U.S. stock market index, as well as ETFs that

track individual U.S. stock market sectors, international indices, and bond indices.

The main categories of ETFs are:

Broad-Based Equity Index Shares. These ETFs track indices like the S&P

500 Index, the NASDAQ Composite Index, as well as large-, mid-, and small-

cap indices.

Sector/Industry Equity Index Shares. These ETFs track indices that

focus on specific sectors such as energy, financial services, healthcare, real

estate, technology, industrial, transportation, and consumer goods, to name a

few.

Global/International Equity Index Shares. These ETFs track indices

focusing on a specific country or region.

Bond Index Shares. These ETFs track U.S. Treasury bond and corporate

bond indices.

Assets of Exchange-Traded Funds by Type(billions of dollars)

Source: Investment Company Institute, December 2006


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WHY ARE ETFs BETTER THAN MUTUAL FUNDS

A mutual fund is simply a pool of money that the fund manager then invests

in stocks, bonds, or other securities. The fund manager makes the decisions,

based upon the goals of the fund (ie, what kind of sectors it can invest it, how

much it can hold in cash, how much it can invest internationally, etc.). The

fund managers buy and sell different positions throughout the year, while

their actual holdings are only published quarterly (otherwise anyone could

"copy" the investment choices of some hot manager). This means that at any

given time, you (as an investor) really have no idea what makes up the

portfolio of the fund - what companies it is investing in, and how much it

holds of each.

ETFs are not like this. They specifically state what industry they are investing

in and what securities they hold and in what quantity - this is all publicly

available at all times, so there is no mystery involved.

Mutual funds also cannot be traded during the day, since they are only valued

at the end of the day after all the underlying securities they hold have been

valued at that days closing price. So you can only trade (buy or sell) a mutual

fund at the end of a market close - not during the day. ETFs are not like this

either. They are constantly valued based on their underlying holdings, and

can be traded any time of the day when the market is open (hence the name,

exchange TRADED funds).

Another major difference is in fees. Mutual funds tend to charge annual fees

between 1-2%, which goes to pay the managers running the fund and making

the investment decisions. ETF fees are a fraction of that, sometimes as low as

.1%. Over the course of a few years, this can add 5% or more to your returns

that otherwise would have been burned up in mutual fund fees. ETFs can also

be margined and options can be bought and sold, just like regular securities.


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Advantages of ETFs over normal open-ended mutual fund

Buying / selling ETFs is as simple as buying / selling any other stock on the

exchange.

ETFs allow investors to take benefit of intra-day movements in the market,

which is not possible with open-ended funds.

With ETFs one pays lower management fees. As ETFs are listed on the

exchange, distribution and other operational expenses are significantly lower,

making it cost-effective. These savings in cost are passed on to the investor.

ETFs have lower tracking error due to the in-kind for creation and

redemption.

Due to its unique structure, the long-term investors are insulated from short

term trading in the fund.

Differences between ETFs and close-ended mutual funds

Though close-ended mutual funds are listed on the exchange they have a limited

number of shares and trade at substantial premiums or more often at discounts to

the actual NAV of the scheme. Also, they lack the transparency, as one does not know

the constitution and value of the underlying portfolio on a daily basis.

The numbers of shares issued are not limited and can be created / redeemed

throughout the day. ETFs rely on market makers and arbitrageurs to maintain

liquidity so as to keep the price in line with the actual NAV.


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COMPARISON OF ETFs V/S OPEN ENDED FUNDS V/S CLOSEENDED FUNDS:

Open EndedFund

Closed EndedFund

Exchange TradedFund

Fund Size Flexible Fixed Flexible

NAV Daily Daily Real Time

LiquidityProvider

Fund Itself Stock Market Stock Market / FundItself

Provider Fund Itself

Availability Fund itself Through Exchangewhere listed

Through Exchangewhere listed / Funditself.

PortfolioDisclosure

Disclosedmonthly

Disclosed monthly Daily/Real-time

Intra-DayTrading

Not possible Expensive Possible at low cost


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THE ADVANTAGES OF EXCHANGE TRADED FUNDS:

a) Tax efficiency

b) Lower costs - (ordinary brokerage commissions apply)

c) Transparency

d) Buying and selling flexibility

e) All day tracking and trading

f) Diversification

g) Dividend opportunities

h) Wide array of investment strategies

i) Core investment

j) Portfolio diversification

k) Hedging

l) Cash management

m) Rebalancing

n) Tax loss strategy

a) Tax efficiency

ETFs, like index funds in general, tend to offer greater tax benefits because they

generate fewer capital gains due to low turnover of the securities that comprise the

portfolio. Generally, an ETF only sells securities to reflect changes in its underlying

index. Exchange trading of ETFs further enhances their tax efficiency. Investors who

want to liquidate shares in an ETF simply sell them to other investors through

exchange trading. Because of this unique structure, ETFs are not required to sell

securities to meet investor cash redemptions, potentially generating capital gains tax

liability for remaining investors. Keep in mind that the sale of an ETF will generate

capital gains/losses for the investor liquidating shares.

b) Lower costs

Expenses can have a significant impact on returns for investors. ETFs, in general,

have significantly lower annual expense ratios than other investment products. ETFs


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are less likely to experience high management fees because they are index-based, not

"actively" managed. And, since they trade on an exchange, ETFs are insulated from

the costs of having to buy and sell securities to accommodate shareholder purchases

and redemptions. Of course, an investor selling ETF shares may realize capital gains

or losses, as with common stocks. Purchases or sales of exchange traded funds are

subject to brokerage commissions.

c) Transparency

ETFs generally are designed to correspond to the performance of their underlying

index or commodity.

d) Buying and selling flexibility

Because they are exchange traded, ETFs can be:

Bought and sold at intraday market prices

Purchased on margin

Sold short

Traded using stop orders and limit orders, which allow investors to specify

the price points at which they are willing to trade

e) All day tracking and trading

ETFs are priced and traded throughout the day, and are not restricted to once-a-day

trading at the end of the day. And because the pricing of ETFs is continuous during

trading hours, investors will always be able to obtain up-to-the-minute share prices

from their broker or financial adviser.

f) Diversification

Because each ETF is comprised of a basket of securities, it inherently provides

diversification across an entire index. Additionally, the expanding universe of ETFs


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available at the American Stock Exchange offers exposure to a diverse variety of

markets, including:

Broad-based equity indexes (such as total market, large-cap growth, and

small-cap value)

Broad-based international and country-specific equity indexes (such as

Europe, EAFE, and Japan)

Industry sector-specific equity indexes (such as healthcare, energy, and real

estate)

U.S. bond indexes (such as long-term Treasury bonds and corporate bonds)

Commodities (such as gold, silver, and oil)

g) Dividend opportunities

Dividends paid by companies and interest paid on bonds held in an ETF are

distributed to ETF holders, less expenses, on a pro rata basis. Of course, not all

companies will pay dividends. Based on past performance, few, if any, distributions

can be expected from certain ETFs. There may also be opportunities for reinvestment

of distributions.

h) Wide array of investment strategies:

Investors can capitalize on the convenience and flexibility of ETFs to pursue a wide

variety of investment strategies.

i) Core investment—Investors can use ETFs as a core investment for their

portfolio. The purchase of shares in a single ETF can provide broad market exposure

for long-term holding that is easy to establish, easy to track, inexpensive, and tax

efficient.


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j) Portfolio diversification—ETFs cover virtually every segment of the equity

market and several segments of the U.S. bond market and commodities, providing an

easy and convenient way to adjust the investment mix of a core portfolio.

k) Hedging—Exchange traded funds can be purchased on margin and sold short,

which has opened up risk management strategies for individual investors that were

once available only to large institutions. For example, ETFs can be sold short to

hedge a core stock portfolio or interest rate fluctuations. This allows investors to

keep their portfolio intact while protecting them from market losses. In a declining

stock market or rising interest rate environment, profits from a short position can

offset some of the losses in a portfolio. (Investors are required to make arrangements

to borrow securities before selling short.) Listed options, available on some ETFs,

also offer opportunities for additional hedging or to increase income. Investors

should contact their broker regarding initial and maintenance margin requirements.

l) Cash management—ETFs have often been used to "equitize" cash, providing a

way for investors to put cash to work in the market or maintain allocation targets

while determining where to invest for the longer term.

m) Rebalancing—Investors can adjust ETF positions at any time throughout the

trading day, without redemption fees or short-term restrictions. Again, usual

brokerage commissions will apply.

n) Tax loss strategy—An investor can sell a security that is underperforming and

claim a tax loss but retain exposure to its sector by investing in an ETF.


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HOW AN ETF COMES TO MARKET

Retail investors who purchase an interest in an ETF do not directly own a pro-rata

interest in the ETF's portfolio. Rather, the investor owns a share in a "creation unit,"

which is issued by the ETF sponsor to a creation unit holder in return for a basket of

securities. In other words, there is a person-typically an institutional investor-

interposed between the retail ETF owner and the ETF sponsor.

How Do ETFs Generate Returns for Investors?

The price of an ETF share depends on the forces of supply and demand in the market

and on the performance of the underlying index. Of course, the performance of the

index is determined by the performance of each component stock.


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In some ways, holding a share in an ETF is like holding a share of any company's

stock. If an investor buys a share of XYZ Company's stock for $10 on Monday and

sells when the share price rises to $20 on Wednesday, he or she has made a $10

profit. But if that investor sells on Friday, when the price of the stock has fallen to $8,

he or she will experience a $2 loss. The same holds true for ETFs.

Pricing, however, differs between mutual funds and ETFs. For a mutual fund, the

price at which investors buy and sell shares is equal to the fund's net asset value

(NAV), less any commissions. The NAVs of both mutual funds and ETFs are

calculated daily at the close of the markets. While investors can buy and sell mutual

fund shares are any time throughout the day, all investors will receive the same

transaction price (the NAV). In contrast, the price of an ETF share is continuously

determined on a stock exchange. Consequently, the price at which investors buy and

sell ETF shares may not necessarily equal the NAV of the portfolio of securities in the

ETF. In addition, two investors selling the same ETF shares at different times on the

same day may receive different prices for their shares, both of which may differ from

the ETF's new asset value.

The price of an ETF share on a stock exchange is influenced by the forces of supply

and demand. For example, when investor’s demand for an ETF increases, the ETF's

share price will rise, perhaps exceeding the ETF's net asset value. ETFs are

structured, however, so that large differences between their share prices and their

NAVs are unlikely to persist. Third parties calculate and disseminate every 15

seconds a measure often called the Inter-day Indicative Value (IIV), which is a real-

time estimate of a fund's NAV. When an ETF's share price is substantially above this

indicative value, institutional investors may find it profitable to deliver the

appropriate basket of securities to the ETF in exchange for ETF shares. Retail

investors may find it profitable to take a short position in the ETF's shares. When an

ETF's share price is substantially below its indicative value, institutional investors

may find it profitable to return ETF shares to the fund in exchange for the ETF's

basket of securities. Retail investors may find it profitable to take a long position in

the ETF's shares. These actions by investors help keep the market-determined price

of an ETF's shares close to the NAV of its underlying portfolio.


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ETFs have been offered to investors since 1993. As indicated by the graph below, an

investor who bought shares of an ETF that tracked the S&P 500 Index in 1993 would

have seen the value of their ETF shares rise or fall to varying degrees over the past 11

years.

Historical S&P 500 Index Performance

(year end)


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UNDERSTANDING THE CREATION/REDEMPTION PROCESS

Unlike mutual funds that invest by purchasing securities with cash on the open

market, ETF shares are created (and redeemed) via a unique in-kind transaction

known as the creation/redemption process.

It Starts with the Authorized Participant

An ETF begins with the fund sponsor’s investment idea. But the official creation

process actually begins with an Authorized Participant (AP). Sometimes called

specialists or market makers, APs are broker/dealers who essentially create, or

“make,” the market for an ETF. The AP initiates the creation of ETFs based on the

need to fill an order or to generate inventory. The AP may also initiate the process

when there is an opportunity for arbitrage. It’s important to note that APs are the

only institutions that may create or redeem shares of an ETF.

Arbitrage

Arbitrage is an investing method in which an investor simultaneously buys and sells

the same or similar security to take advantage of a price difference. In the case of

ETFs, it is the difference between the current ETF price and ETF net asset value,

which indicates the actual value of the underlying securities.


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Creation Unit

A set of shares or securities that makes up one unit of the fund held by the trust that

underlies an exchange traded fund (ETF). One creation unit is the denomination of

underlying assets that can be redeemed for a specified number of ETF shares.

Net Asset Value (NAV)

NAV is the dollar value of a single ETF share, based on the value of the underlying

assets of the fund, minus its liabilities, divided by the number of shares outstanding.

NAV is calculated at the end of each business day.

The Creation Unit

To create an ETF, the AP purchases or borrows the underlying stocks. The stocks are

then bundled together, creating a basket of stocks, or Creation Unit. The Creation


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Unit typically mirrors or approximates a specific index—like the S&P Equal Weight

Index—and is calculated at Net Asset Value (NAV). Set by the issuer, the Creation

Unit is usually large enough to purchase 50,000 to 100,000 shares of the ETF. The

issuer determines the NAV and how many shares will make up the ETF.

Now In Reverse: The Redemption Process

The redemption process is simply the reverse of the creation process. The AP

purchases a large number of ETF shares on the open market, then redeems or

exchanges the shares for the underlying basket of securities and sells them to the

market. Once again, there are no trading costs for the portfolio and all of the

transaction costs are covered by the AP. This is still an in-kind transaction because

there is no cash exchanged.

As alluded to earlier, the ETF redemption process may provide investors with

enhanced tax efficiency. When a share of a mutual fund is redeemed, the fund is

often required to sell some of its portfolio holdings to raise the necessary cash to

return to departing shareholders. And when a fund sells its holdings, it incurs capital

gains, which are then, are distributed to the remaining shareholders. But since an

ETF’s shares are exchanged in-kind for equal value, there is no taxable gain on the

transaction.

Custodian Bank

Custodian bank is a banking institution that holds in custody and safekeeping the

securities and other assets of an investment company.


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Information regarding buying and selling of ETF

ETFs do not sell individual shares directly to investors and only issue their

shares in large blocks (blocks of 50,000 shares, for example) that are known

as "Creation Units."

Investors generally do not purchase Creation Units with cash. Instead, they

buy Creation Units with a basket of securities that generally mirrors the ETF’s

portfolio. Those who purchase Creation Units are frequently institutions.

After purchasing a Creation Unit, an investor often splits it up and sells the

individual shares on a secondary market. This permits other investors to

purchase individual shares (instead of Creation Units).

Investors who want to sell their ETF shares have two options:

(1) they can sell individual shares to other investors on the secondary market,

or

(2) they can sell the Creation Units back to the ETF. In addition, ETFs

generally redeem Creation Units by giving investors the securities that

comprise the portfolio instead of cash.

So, for example, an ETF invested in the stocks contained in the Dow Jones Industrial

Average (DJIA) would give a redeeming shareholder the actual securities that

constitute the DJIA instead of cash. Because of the limited redeemability of ETF

shares, ETFs are not considered to be—and may not call themselves—mutual funds.

An ETF, like any other type of investment company, will have a prospectus.

All investors that purchase Creation Units receive a prospectus. Some ETFs

also deliver a prospectus to secondary market purchasers.

ETFs that do not deliver a prospectus are required to give investors a

document known as a Product Description, which summarizes key


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information about the ETF and explains how to obtain a prospectus. All ETFs

will deliver a prospectus upon request.

What are the USES OF ETFs?

Asset Allocation: Studies have shown that Asset Allocation is what drives long-

term accumulation of wealth as can be seen from the following chart below:

Until recently however, managing asset allocation could be difficult for individual

investors given the costs and assets required to achieve proper levels of

diversification. ETFs provide investors with exposure to broad segments of the equity

markets. They cover a range of style and size spectrums, enabling investors to build

customized investment portfolios consistent with their financial needs, risk

tolerance, and investment horizon. Both institutional and individual investors use

ETFs to conveniently, efficiently, and cost effectively allocate their assets.

Cash Equitisation: Investors typically seek exposure to equity markets, but often

need time to make investment decisions. ETFs provide a "parking place" for cash

that is designated for equity investment. Because ETFs are liquid, investors can

participate in the market while deciding where to invest the funds for the longer-

term - thus avoiding potential opportunity costs. Historically, investors have relied

heavily on derivatives to achieve temporary exposure. However, derivatives are not

always a practical solution. The large denomination of most derivative contracts can


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preclude investors -- both institutional and individual -- from using them to gain

market exposure. In this case and in those where derivative use may be restricted -

ETFs are a practical alternative.

Hedging Risks: ETFs are an excellent hedging vehicle because they can be

borrowed and sold short. The smaller denominations in which ETFs trade relative to

most derivative contracts provides a more accurate risk exposure match, particularly

for small investment portfolios.

Arbitrage (Cash Vs Futures) and Covered Option Strategies. : ETF's can be

used to arbitrage between cash and futures market, as it is very easy to trade. ETF's

can also be used for cover option strategies on the index.

What happens if constituents in the underlying index change?

Constituents of an index are changed as and when securities in the index do not

match specific criteria laid down by the index service provider. The index service

provider usually makes announcements of change well in advance. Once securities in

the underlying index are changed, the fund would change the securities in its

underlying portfolio by selling the securities that are being removed from the index

and including those that are included in the index. This will in no way affect the units

being held by an investor, as the units will continue to track the index. The only effect

may be on the tracking error of the scheme.

Index changes are usually not so frequent. In India, historically, around 10% of the

index constituents have changed annually which means an index of 50 securities

would experience about 5 changes every year.


30

What Are the Risks of Investing in ETFs?

All investments, including ETFs, involve varying degrees and types of risk, including

the potential loss of money. While investment diversification mitigates the effect of a

decline in the value of any one security in an ETF portfolio, an ETF's value could

decline due to larger economic events or policy changes affecting the underlying

index (e.g., a recession). This is known as market risk. ETFs tracking a bond index

are also subject to interest rate risk, which is the possibility that changes in interest

rates will lower the price of bonds and reduce the value of an ETF's portfolio.

Who Regulates ETFs?

The vast majorities of exchange-traded funds are registered with the Securities and

Exchange Commission (SEC) and must comply with the applicable provisions of the

Investment Company Act, except to the extent the fund or trust has received

exemptive relief from the Act.

Exchange-traded funds have obtained exemptive relief to

Allow them to register as mutual funds under the Act even though their

shares are not individually redeemable (ETFs are, however, prohibited from

referring to themselves as mutual funds.);

Permit affiliated entities to purchase and redeem shares in kind rather than in

cash; and

Enable their shares to trade at negotiated prices on an exchange rather than

at a current offering price described in the prospectus or at a price based on

net asset value (NAV).

As of 2006, about 3 percent of ETF assets were not registered with or regulated by

the SEC under the Investment Company Act. These ETFs are commodity-based.

Those ETFs that invest in commodity futures are regulated by the Commodity

Futures Trading Commission (CFTC), while the ETFs that invest solely in physical

commodities are not regulated by the CFTC.


31

Legal Structures of Exchange-Traded Funds

There are 3 main legal structures for exchange-traded funds, which determines, to

some extent, how they operate. An ETF organized as an open-end mutual fund or a

unit investment trust are required to register as investment companies under the

Investment Company Act of 1940.

ETFs Organized as an Open-End Fund

An exchange-traded fund organized as an open-end investment company must

supply investors in the secondary market with a Product Description, or profile,

which summarizes key information contained in the fund’s prospectus, such as the

fund's investment objectives, principal investment strategies, principal risks,

performance, fees and expenses, identity of the fund’s investment adviser,

investment requirements, and other information, and informs investors on how to

obtain a prospectus. Authorized Participants automatically get a prospectus.

Statements of additional information (SAI) must be provided upon request

free of charge. The SAI generally includes the fund’s financial statements and

information (or additional information) about: the history of the fund; some fund

policies (such as on borrowing and concentration policies); officers, directors, and

persons who control the fund; investment advisory, and other services; brokerage

commissions; tax matters; and performance such as yield and average annual total

return information.

The open-end fund must also provide shareholders with annual and semi-annual

reports, 60 days after the end of the fund’s fiscal year and 60 days after the fund’s

fiscal mid-year. These reports contain a variety of updated financial information, a

list of the fund’s portfolio securities, and other information.

Open-end ETFs reinvest dividends as soon as they are received and are paid out

quarterly. To increase income, the fund can include derivatives in its portfolio and

lend its securities.


32

ETFs Organized as Unit Investment Trusts

Although ETFs organized as unit investment trusts (UIT) track an index, they

are restricted as to security weightings. These restrictions include the following: no

asset can compose more than 25% of the index; in diversified funds, securities that

have a weighting of 5% or greater cannot compose more than 25% of the fund; and

with funds in more restricted sectors, these assets cannot compose more than 50% of

the fund. Dividends are paid quarterly, but are not reinvested. The best example of

this kind of trust is the NASDAQ-100 Trust, which sponsors the QQQQ ETF and is

currently the most actively traded ETF.

Exchange-Traded Grantor Trusts

The exchange-traded grantor trust is not a registered investment company, and

is not an actual ETF. Investors have voting rights in the companies composing the

fund, and the investors can create or redeem shares in round lots of 100. Dividends

are not reinvested and are paid immediately to investors. Holding Company

Depositary Receipts (HOLDRs), a proprietary product of Merrill Lynch, is an

example of the exchange-traded grantor trust. HOLDRs generally cover a narrow

sector of the market, such as the Biotech (BBH) or Broadband (BDH) HOLDRs.

The portfolio of the exchange-traded grantor trust does not change, and, thus, cannot

be rebalanced, which can lead to less diversification as some of the companies grow

larger than the others in the portfolio, nor can stocks that fit the trust’s profile be

added later. Thus, it is inevitable that, over time, these trusts will become less

diversified. For example, Internet Holding Co. Holdrs Trust (HHH) has more than

50% of its portfolio invested in just Yahoo and eBay, but none in Google, because

Google had it’s IPO after this HOLDR was created.


33

Comparison of ETFs with Index Futures

Index Futures have gained wide acceptance globally as a tradable means of shifting

exposure to indices. Index Futures are advantageous when the implied cost of carry

is less than the actual cost of carry. In addition, an investment in ETFs requires

investment of the entire notional value, while an investment in futures requires

posting of an initial collateral deposit and then daily market to market margins

which represent a small fraction of the notional value, allowing leverage.

ETFs are beneficial over Index Futures in many situations:

When investors cannot or prefer not to trade index futures

When cash flows are small and investors do not have enough cash to purchase

a futures contract

For longer-term horizons, index futures need to be rolled over every quarter

which has its own risk and costs

If regulations prevent investors from investing in futures

Taxation issues: With Index Futures investors can avail of only short-term

capital gains while with ETFs, investors can avail long-term capital gains

If the discount in ETFs is greater than the discount in futures


34

FAMILIES/ISSUERS OF EXCHANGE TRADED FUNDS

1. BGI/iShares

2. SSgA

3. Vanguard

4. Invesco/PowerShares

5. ProFunds

6. Bank of NY

7. Merrill (HOLDRs)

8. Rydex

9. Van Eck

10. Wisdom Tree

11. Claymore

12. Ameristock/Victoria Bay

13. First Trust

14. MacroShares

15. X-Shares

16. Goldman Sachs

17. Fidelity

18. Bear Stearns

19. Northern Trust

20.Greenhaven

21. FocusShares

22.SPA

23. RevenueShares

24.Ziegler

25. ETF Total


35

ETF PERFORMANCE GLOBALLY

New ETFs Are Reaching Untapped Markets, Offering Innovative Strategies

So far, 2008 has been an interesting year for exchange traded funds (ETFs).

Between Dec. 28, 2007, and May 16 of this year, 50 new ETFs have launched. Matthew

Hougan for Index Universe counts three of them as "major successes," defined by him

as having $100 million or more in assets:

WisdomTree India Earnings (EPI): $267 million in assets; down 11.7% since

Feb. 26 launch

Market Vectors Coal (KOL): $237 million; up 30.6% since Jan. 15 launch

Claymore/Mac Global Solar Energy (TAN): $116 million; up 10.5% since April

15 launch

Many of the newer ETFs cover areas of the market that have been untapped and/or offer

new strategies.

Bear Stearns Current Yield Fund (YYY) was the first actively managed ETF to hit the

market. EPI India fund benefits investors because it was the first of its kind to market and

covers an area that was in high demand by investors.

Coal and solar are both new and growing asset classes which take advantage of the search

for new energy sources, a topic that is at the forefront of many people's minds at the

moment.

Katy Marquardt for U.S. News & World Report lists 10 things investors need to know about

them. We've highlighted the most interesting ones:

ETFs aren't new. You may have just heard about them, but in the United States, the

first one launched in 1993. Known as the SPDRs (ticker symbol SPY and pronounced

"spiders"), it tracks the S&P 500. Today, there are more than 600 ETFs.

Despite how quickly they're growing, ETFs are still a relatively small portion of

investors' dollars. At the end of March, there were $571 billion in assets in ETFs.

Compare that with roughly $12 trillion in mutual funds. But it also took mutual

funds 45 years to reach $600 billion in assets.


36

Fees are low, but not always. There are some ETFs that charge higher fees, but as

competition increases, this issue may resolve itself. And even so, the fee in a

particular ETF might be higher than the average, but it also still may be cheaper than

a mutual fund or individual stock-picking.

ETFs want your retirement money. There's a big push to start getting ETFs into

401(k) plans, but what's taking so long? Investors need to start taking charge and

talk to their human resources department to find out why ETFs aren't available to

them. The ETF industry is watching this issue closely, and you haven't heard the last

of it.

Worldwide ETF Growth Chart


37

The Most Successful ETFs This Year

Those funds have $267 million, $237 million and $116 million in assets, respectively.

Knocking on the door of the $100 million figure are the SPDR DB International

Government Inflation-Protected Bond ETF (WIP) and PowerShares Preferred Portfolio

(PGX), which have $96 million and $90 million, respectively.

All numbers are through May 16, 2008.

ETFs Launched Since January 1, 2008 - Sorted By Assets

Fund Company Ticker Assets ($)

WisdomTree India Earnings Fund WisdomTree EPI 266,988,000

Market Vectors - Coal ETF Van Eck KOL 236,882,500

Claymore/MAC Global Solar Energy Index ETF Claymore TAN 116,524,800

SPDR DB International Government Inflation-Protected Bond ETF SSgA WIP 95,904,000

PowerShares Preferred Portfolio PowerShares PGX 89,958,000

Bear Stearns Current Yield Fund Bear Stearns YYY 50,215,000

iShares MSCI Turkey Investable Market IndexFund BGI TUR 43,464,000

PowerShares India Portfolio Fund ExchangeTraded Fund PowerShares PIN 42,770,400

GreenHaven Continuous Commodity IndexFund GreenHaven GCC 32,167,000

iShares MSCI Thailand Investable Market IndexFund BGI THD 30,666,000

SPDR S&P International Dividend ETF SSgA DWX 29,832,000

PowerShares Global Nuclear Energy PortfolioETF PowerShares PKN 24,642,000


38

Market Vectors - Lehman Brothers AMT-FreeLong Municipal Index ETF Van Eck MLN 24,315,000

ProShares UltraShort Lehman 20+ YearTreasury ProShares TBT 20,997,000

RevenueShares Large Cap Fund ETF RevenueShares RWL 20,936,575

WisdomTree Dreyfus Euro Fund WisdomTree EU 20,064,000

United States Gasoline Fund, LP Victoria Bay UGA 17,598,000

NETS TM TOPIX® Index Fund (Japan) NETS TYI 16,140,000

ProShares UltraShort Lehman 7-10 YearTreasury ProShares PST 15,770,250

ProShares Ultra Telecommunications ProShares LTL 13,266,000

Market Vectors-Solar Energy ETF Van Eck KWT 12,921,000

Claymore/AlphaShares China Small Cap IndexETF Claymore HAO 11,822,400

United States Heating Oil Fund, LP Victoria Bay UHN 11,796,000

Claymore US-1 - The Capital Markets IndexETF Claymore UEM 10,330,000

WisdomTree Dreyfus Brazilian Real Fund WisdomTree BZF 10,100,000

WisdomTree Dreyfus Chinese Yuan Fund WisdomTree CYB 9,980,000

WisdomTree Dreyfus Indian Rupee Fund WisdomTree ICN 9,896,000

iShares MSCI Israel BGI EIS 8,211,000

ProShares UltraShort Telecommunications ProShares TLL 8,125,500

SPDR S&P International Mid Cap ETF SSgA MDD 7,150,000

RevenueShares Mid Cap Fund ETF RevenueShares RWK 5,465,996

SPDR S&P Emerging Markets Small Cap ETF SSgA EWX 5,307,000


39

RevenueShares Small Cap Fund ETF RevenueShares RWJ 5,166,917

NETS DAX Index Fund NETS DAX 5,154,000

SPDR DJ Wilshire Global Real Estate ETF SSgA RWO 5,064,000

Cohen & Steers Global Realty Majors ETF ALPS ETF GRI 5,008,200

Claymore U.S. Capital Markets Micro-TermFixed Income ETF Claymore ULQ 5,007,000

Market Vectors-Lehman Brothers AMT-FreeShort Municipal Index ETF Van Eck SMB 4,955,000

Claymore U.S. Capital Markets Bond ETF Claymore UBD 4,954,000

Market Vectors - Gaming ETF Van Eck BJK 3,904,000

PowerShares- Active Alpha Q Fund PowerShares PQY 2,804,770

PowerShares- Active Alpha Multi-Cap Fund PowerShares PQZ 2,750,230

PowerShares- Active Mega-Cap Portfolio PowerShares PMA 2,678,520

NETS S&P/ASX 200 Index Fund NETS AUS 2,674,000

CAC 40® Index Fund (France) NETS FRC 2,601,000

NETSTM Hang Seng Index Fund (Hong Kong) NETS HKG 2,597,000

NETS FTSE 100 Index Fund NETS LDN 2,575,000

NETS FTSE/JSE Top 40 Index Fund NETS JNB 2,531,000

NETS S&P/MIB Index Fund NETS ITL 2,490,000

PowerShares- Active Low Duration Portfolio PowerShares PLK 2,488,640

NETS FTSE Singapore Straits Times IndexFund NETS SGT 2,466,000

Source: American Stock Exchange


40

Company-By-Company Basis

Another interesting way to look at this data is to sort things by company. So far this year,

WisdomTree's new ETFs have attracted the most assets ($317 million), which explains some

of that company's success in boosting total assets under management from $4 billion to $5

billion.

Van Eck takes a strong second place with $283 million, followed by PowerShares at $168

million, Claymore at $148 million and SSgA at $143 million.

Here's the full table, sorted by assets.

ETFs Launched Since January 1,

2008

Company Funds Assets ($)

WisdomTree 5 317,028,000

Van Eck 5 282,977,500

PowerShares 7 168,092,560

Claymore 5 148,638,200

SSgA 5 143,257,000

BGI 3 82,341,000

ProShares 4 58,158,750

Bear Stearns 1 50,215,000

Northern Trust 9 39,228,000

GreenHaven 1 32,167,000

RevenueShares 3 31,569,488

Victoria Bay 2 29,394,000

ALPS 1 5,008,200

Source: American Stock Exchange


41

April Showers Bring May ETF Flowers

Twenty-three new ETFs were added to the fold in May, and the most positive performance

was seen by global equity markets, according to ETF Snapshot. The industry also pulled in

another $17 billion in assets.

The number of available ETFs grew by 34.7%, from May 2007, while total assets grew 26.1%

from the previous year.

As of May 31, there were 683 ETFs in the US --- with assets totaling approximately $612BN

--- Managed by 25 ETF managers.

US LISTED ETF ASSET GROWTH


42

ETF INDUSTRY DETAILS:

Asset Classes — Overall

Global equity prices rose for a second consecutive month. The S&P 500 gained 1.3%

while MSCI EAFE gained 0.97%. US bond prices fell for the second consecutive month

with the Lehman U.S. Aggregate Index dropping 0.73%.

Commodity and International assets saw strong increases.

FIGURE 2: CHANGE IN ETF ASSETS AND NUMBERS BY TYPE

MAY APRIL Δ YTD Δ

CATEGORY # OFETFs

CURRENTASSETS

(MM)

# OFETFs

ASSETS(MM)

ASSETCHANGE

(%)

# OFETFs

ASSETS(MM)

ASSETCHANGE

(%)

BROAD 10 $16,347 - $618 3.9 - $402 2.5

COMMODITY 22 $32,038 - $2,226 7.5 2 $6,381 24.9

CURRENCY 16 $5,009 5 $442 9.7 5 $1,487 42.2

DIVIDEND/FUNDAMENTAL 105 $13,612 - -$32 -0.2 4 -$811 -5.6

FIXED INCOME 56 $43,035 1 $747 1.8 8 $8,269 23.8

GLOBAL 14 $5,715 2 $332 6.2 2 $475 9.1

INTERNATIONAL 112 $165,997 10 $5,338 3.3 22 $1,045 0.6

INVERSE/LEVERAGED 68 $18,089 2 $1,209 7.2 6 $8,478 88.2

SECTOR 138 $61,993 - -$2,751 -4.2 - $4,290 7.4

SIZE 33 $170,163 - $3,425 2.1 2-$26,757 -13.6

SPECIALTY 63 $10,423 3 $1,390 15.4 5 $2,980 40.0

STYLE 46 $69,322 - $3,974 6.1 -2 -$2,167 -3.0

TOTALS 683 $611,743 23 $16,918 2.8 54 $4,071 0.7


43

SIZE/STYLE

Both Small and Mid Cap saw assets rise in double-digit percentage terms for the month.

Small Cap assets were up 17%.

FIGURE 3: CHANGE IN ETF ASSETS BY MARKET CAP/STYLE

MAY APRIL Δ YTD Δ

CATEGORY # OFETFs

CURRENTASSETS (MM)

# OFETFs

ASSETS(MM)

ASSETCHANGE

(%)

# OFETFs

ASSETS(MM)

ASSETCHANGE

(%)

BROAD 10 $16,347 - $618 3.9 - $402 2.5

SIZE - LARGECAP

16 $132,467 - -$1,016 -0.8 1 -$27,077 -17.0

SIZE - MICROCAP

3 $396 - $5 1.3 - -$61 -13.4

SIZE - MIDCAP

7 $20,057 - $1,851 10.2 - -$15 -0.1

SIZE - SMALLCAP

7 $17,243 - $2,584 17.6 1 $396 2.3

GROWTH 23 $39,134 - $2,327 6.3 -1 -$1,245 -3.1

VALUE 23 $30,188 - $1,647 5.8 -1 -$923 -3.0

TOTALS 89 $255,832 - $8,017 3.2 - -$28,522 -10.0


44

SECTOR

There were large outflows in both the Financial and REIT sectors.

FIGURE 4: CHANGE IN ETF ASSETS BY US SECTOR

MAY APRIL Δ YTD Δ

CATEGORY # OFETFs

ASSETS(MM)

# OFETFs

ASSETS(MM)

ASSETCHANGE

(%)

# OFETFs

ASSETS(MM)

ASSETCHANGE

(%)

CONSUMERDISCRETIONARY

8 $2,177 - -$499 -18.7 - $570 35.5

CONSUMERSTAPLES

10 $3,505 - -$236 -6.3 - $293 9.1

ENERGY 11 $11,960 - $894 8.1 - -$495 -4.0

FINANCIALS 14 $9,732 - -$2,181 -18.3 - $2,589 36.2

HEALTH CARE 33 $5,215 - $108 2.1 - -$298 -5.4

INDUSTRIALS 9 $3,802 - $47 1.2 - $400 11.8

MATERIAL 7 $4,914 - -$282 -5.4 - $711 16.9

REIT 17 $7,874 - -$1,150 -12.7 - $1,160 17.3

TECHNOLOGY 23 $9,236 - $603 7.0 - -$460 -4.7

UTILITIES 6 $3,578 - -$54 -1.5 - -$179 -4.8

TOTALS 138 $61,993 --$2,751 -4.3

- $4,290 7.4


45

MANAGER AND FUND DETAIL

The top three managers in the US ETF marketplace were BGI, State Street, and Vanguard.

Collectively, they accounted for approximately 85% of the US-listed ETF market.

FIGURE 5: US ETF ASSETS BY MANAGER

MAY 2008 YTD Δ

MANAGER # OFETFs

ASSETS(MM)

MARKETSHARE (%)

# OFETFs

ASSETS(MM)

MARKETSHARE (%)

STATE STREET 70 $141,453 23.1 5 -$16,652 -2.9

ALPS 1 $5 0.0 1 $5 0.0

AMERISTOCK 5 $13 0.0 - $ 0.0

BEARS STEARNS 1 $50 0.0 1 $50 0.0

BGI 159 $325,055 53.1 5 -$4,024 -1.0

BNY 6 $27,674 4.5 - -$5,411 -0.9

CLAYMORE 30 $2,371 0.4 -6 $439 0.1

FIDELITY 1 $109 0.0 - -$5 0.0

FIRST TRUST ADVISORS 36 $1,086 0.2 - $70 0.0

FOCUSSHARES 4 $18 0.0 - -$5 0.0

GREENHAVEN 1 $32 0.0 1 $32 0.0

LONDON AND CAPITAL ASSETMANAGEMENT

6 $20 0.0 - $4 0.0

MACROSHARES 2 $988 0.2 - $928 0.2

NORTHERN TRUST 14 $52 0.0 14 $52 0.0

POWERSHARES 107 $14,157 2.3 12 $196 0.0

POWERSHARES/DBCOMMODITY SERVICES

11 $6,919 1.1 - $3,298 0.5

PROSHARES 62 $17,957 2.9 4 $8,337 1.4

REVENUESHARES 3 $31 0.0 3 $31 0.0

RYDEX 31 $6,143 1.0 - $663 0.1

VAN ECK 13 $6,551 1.1 5 $2,958 0.5


46

MAY 2008 YTD Δ

MANAGER # OFETFs

ASSETS(MM)

MARKETSHARE (%)

# OFETFs

ASSETS(MM)

MARKETSHARE (%)

VANGUARD 37 $54,137 8.8 - $12,075 1.9

VICTORIA BAY ASSET 5 $1,655 0.3 2 $554 0.1

WISDOMTREE 46 $4,995 0.8 7 $472 0.1

XSHARES 31 $266 0.0 - $7 0.0

ZIEGLER CAPITALMANAGEMENT

1 $5 0.0 --$3

0.0

Volume was relatively stable at $66BN, up from $63BN a month ago. This represents morethan 10% of the total value of the US ETF market.


47

FIGURE 6: TOP US ETFS BY TRADING VOLUME (AS OF MAY 31, 2008)

ETF TICKER AVG. DAILY SHAREVOLUME (MM)

AVG. DAILY DOLLARVOLUME (MM)

S&P 500 SPDR SPY 177 $24,791

NASDAQ-100 INDEX TRACKINGSTOCK

QQQQ 129 $6,473

ISHARES RUSSELL 2000 IWM 63 $4,679

ENERGY SELECT SECTOR SPDR XLE 27 $2,317

FINANCIAL SELECT SECTORSPDR

XLF 85 $2,107

ISHARES MSCI EM EEM 12 $1,781

DOW DIAMONDS - DJIA DIA 11 $1,421

ULTRASHORT QQQPROSHARES

QID 34 $1,285

ULTRA QQQ PROSHARES QLD 14 $1,276

ISHARES MSCI-BRAZIL EWZ 13 $1,267

The top three US ETFs in terms of dollar volume traded for the month were the SPDR S&P

500 [SPY], the most liquid stock in the world; the NASDAQ 100 Index Tracking Stock

[QQQQ]; and the iShares Russell 2000 Index Fund [IWM].

The top three US ETFs in terms of assets were the SPDR S&P 500 [SPY], the iShares MSCI

EAFE Fund [EFA], and the iShares MSCI Emerging Markets ETF [EEM].


48

ETF MARKET FIVE YEARS DOWN THE LINE:

Cliff Weber, executive vice president of development and strategy, American

Stock Exchange: Over the past five years, the ETF universe has exploded. The number of

ETFs in the U.S. has grown from 130 to 646; the number of domestic issuers has increased

from five to 23; assets under management have increased from $101.6 billion to $620.5

billion. [These numbers compare the end of 2002 with the end of 2007.] This growth has

been fueled by the increasing awareness and acceptance of the ETF structure, the expansion

of the product category to include new asset classes like commodities, and the extension of

the product into narrower sub-segments of the market and into more strategy-based and

theme-based indexes.

I think the next significant trend that will drive ETF growth will be the introduction of true

active management into the ETF structure. ETFs ultimately are a very flexible and efficient

distribution platform. The successful extension of this platform to truly actively managed

portfolios will open the category up to the many, many investment managers that currently

do not issue ETF shares because they don't run index funds and don't want to disclose their

funds' holdings. The net result will be a much broader base of issuers. And while I don't

expect that many of these new funds will be very active traders, I'm quite sure that once

these funds are available, smart investors will create new and innovative ways to use them

for alpha capture strategies, etc.


49

“EXCHANGE TRADED FUNDS

IN INDIA”


50

INDIAN EXCHANGE TRADED FUNDS

Exchange Traded Funds in India listings include gold, silver and currencies. ETF funds are a

new alternative to investing in mutual funds and hedge fund as they minimize the risk

involved in the investment in other finance solutions. Assets of India’s exchange-traded

funds (ETFs) increased by more than six times in the past one and a half years, aided by the

India growth story. Their assets under management increased to Rs.63.77billion as on

September 30, 2007, from Rs.8.69 billion as on March 31, 2006.

According to Krishnan Sitaraman, Head – FundServices and Fixed Income

Research, CRISIL, “The continuing bull run in the Indian market has led to renewed

interest and participation in the equity markets. This has also led to higher valuations,

increased volatility, and broadening of the stock markets, resulting in ETFs and index funds

gaining in popularity.”

Most ETFs in India are index funds. Notable among them are Nifty Benchmark Exchange

Traded Scheme (BeES), Bank BeES, and Liquid BeES. Recently, several fund houses also

launched gold funds in the form of ETFs.

The first ETF in India, Nifty BeES, based on the S&P CNX Nifty, was launched in January

2002. However, ETFs did not gain popularity overnight because they were vastly

outperformed by active funds until recently. Also, ETFs being a recent and complex

innovation, retail investor acceptance for them was slow in the initial years. In recent years,

however, the popularity of ETFs has been growing in India on the back of the continuing

bull run, and the increasing volatility and broadening of the stock markets. At present, Bank

BeES, a banking sector ETF that tracks the CNX Bank Index, is the most popular ETF.

As for the BSE, there’s one ETF tracks the BSE Sensex 30 index - the SPIcE. It was launched

in 2003, suspended in 2005 & then re-launched in 2006.

The ETF advantages include the flexibility they offer in terms of trading along with the pros

of mutual funds securities. ETF funds are available in different forms and can be selected as

per the requirements. These include ETF bond funds, ETF dividends, ETF hedge fund, ETF

junk bonds, ETF mutual funds, ETF real estate stocks, ETF iShares, and many more forms.


51

ETFS IN INDIA

1. Nifty BeES

2. Liquid Benchmark Exchange Traded Scheme (Liquid BeES)

3. Junior Nifty BeES

4. Bank BeES

5. S&P CNX Nifty UTI Notional Depository Reciepts Scheme (SUNDER)

6. PSUBNKBEES

7. KOTAKPSUBK

8. KOTAK SENSEX ETF

9. QNIFTY

10. RELBANK

11. GOLDBEES

12. UTI GOLDSHARE

13. KOTAKGOLD

14. RELGOLD

15. QUANTUMGOLD


52

1. NIFTY BEES

Investment Objective:

The investment objective of Nifty BeES is to provide investment returns that, before

expenses, closely correspond to the total returns of securities as represented by the S&P

CNX Nifty Index.

Nifty BeES trades on the Capital Market segment of NSE. Each Nifty BeES unit is 1/10th of

the S&P CNX Nifty Index value. Nifty BeES units are traded and settled in dematerialised

form like any other share in the rolling settlement.

Nifty BeES

Allotment Date : December 28, 2001

Average AUM For The Month : Rs. 408.71 Cr.

NAV : Rs.409.4035

First Exchange Traded Fund (ETF) in India

Combination of a Share and a Mutual Fund Unit

Real-Time Trading on NSE

Tracks the S&P CNX Nifty Index priced at 1/10th of the Nifty Index

Minimum Lot-size for Real-time Cash Creation / Redemption with the Fund is

10,000 units

Nifty BeES

ISIN code INF732E01011

NSE symbol NIFTYBEES

Series EQ

Reuters code NBES.NS

Face value Rs. 10

Reuters NBES.NS


53

Bloomberg NBEES:IN

Total Expense Ratio 0.50% p.a.

Tracking Error 0.19% annualized

Entry/Exit Load NIL

Performance History of Nifty BeES

1M TH 3 M THS 6 M THS 1 YR 3 YRS 5 YRSSINCE

INCEPTIO N

N ifty BeES -16.92% -14.45% -34.05% -6.16% 23.84% 31.00% 24.75%

CN X N ifty Index(Ben chm ark Returns)

-17.03% -14.66% -34.18% -6.40% 22.06% 28.89% 23.29%

Total ReturnsIndex

-16.97% -14.45% -33.93% -5.60% 23.75% 31.08% 25.52%


54

Golden Peacock Award

Nifty BeES won the Golden Peacock Award for the Most Innovative Financial Product in

2002-03 given by the Institute Of Directors (IOD), New Delhi.

Advantages of Nifty BeES

Nifty BeES is Simple: Nifty BeES can be bought / sold like a share through any NSE

terminal at prices available on the screen. The underlying portfolio of Nifty BeES

very closely replicates that of the S&P CNX Nifty. Hence, Nifty BeES tracks the

movement of S&P CNX Nifty.

Nifty BeES is Economical: Nifty BeES is a no load scheme. The annual expense

ratio including management fees is a maximum of 0.80% of the Daily Average Net

Assets, which is one of the lowest for any mutual fund scheme in India. The costs

reduce further to 0.65%, for assets over Rs.500 crore.

Nifty BeES is Convenient: As it is listed and traded on the NSE, Nifty BeES can be

bought / sold throughout the trading day just by a call to your broker. This gives you

the power to react swiftly to changes in the market. You can even place limit orders.

Nifty BeES can be held in your DP account with other portfolio holdings.

Nifty BeES is Liquid: The structure of Nifty BeES attracts liquidity from various

sources such as buying / selling by investors, arbitrage with index futures, arbitrage

by authorized participants with the underlying shares.

Nifty BeES is Neutral: The performance of Nifty BeES is simply the result of

performance of shares in the S&P CNX Nifty Index and demand & supply in the

market. There is no Fund manager bias.

Nifty BeES is Transparent: As Nifty BeES replicates the S&P CNX Nifty, investors

can know at any given point of time where and how much is invested in each stock.


55

Nifty BeES gives Instant Diversification: Investing in just one unit gives exposure

to fifty shares of the S&P CNX Nifty. This allows investors to spread risk with one

single decision.

Nifty BeES is an Equitable Structure: The unique “in-kind” mechanism of

creating / redeeming Nifty BeES by exchanging a pre-defined portfolio ensures that

long-term investors do not bear the cost of short term trading as observed in

traditional Open-ended structure. This insulates long-term investors from short-

term trading activity.


56

2. LIQUID BENCHMARK EXCHANGE TRADED SCHEME (LIQUID BEES)

Liquid BeES (Liquid Benchmark Exchange Traded Scheme) is the first money market ETF

(Exchange Traded Fund) in the world. The investment objective of the Scheme is to provide

money market returns. Liquid BeES will invest in a basket of call money, short-term

government securities and money market instruments of short and medium maturities. It is

listed and traded on the NSE – Capital Market Segment and is settled on a T+2 Rolling

basis.

The Fund will endeavor to provide daily returns o the investors, which will accrue in the

form of daily dividend, which will be compulsorily reinvested in the Fund daily. The units

arising out of dividend reinvestment will be allotted and credited to the Demat account of

the investors at the end of every month. Such units of Liquid BeES will be allotted and

credited daily, up to 3 decimal places.

NSDL and CDSL have waived all the charges (including Custodian charges) relating to

transactions in Liquid BeES in the NSDL and CDSL depository systems respectively.

Liquid BeES

Allotment Date : July 08, 2003


Benchmark Index : Crisil Liquid Fund

NAV : Rs.1000

Face Value : Rs.100 Per Unit

Minimum Lot : One unit/share


57

Liquid BeES


NSE symbol LIQUIDBEES

Series EQ

Face value Rs. 100

Entry/ Exit load NIL

Depository charges NIL

Reuters LBES.NS

Bloomberg LBEES:IN

Total Expense Ratio 0.60% p.a

PERFORMANCE:


58

How can an investor invest/ redeem Liquid BeES units ?

An investor can invest / redeem Liquid BeES in two ways:

1. Buy/ Sell directly on NSE, Minimum 1 unit of Rs. 1000

2. Directly from the Fund, with a Minimum Subscription of Rs.25 lacs and minimum

redemption of 2500 units on T+1 settlement subject to clearance of funds/ transfer of units.

Advantages of Liquid BeES

For Investors

Earn returns on idle funds

Set off trades from equity to cash and from cash to equity

Ability to earn higher returns than a savings account, with the same liquidity as cash

Ability to earn returns for less than 7 days

Can be used for paying margins to brokers

For Brokers

Lesser working capital and efficient cash management

Can be used for paying margins to the Stock Exchange - SEBI vide its circular no.

SEBI/SMD/SE/Cir-22/2003 dated June 11, 2003 has directed the stock exchanges

to include Liquid Mutual Fund units in the list of securities eligible as “Cash or Cash

Equivalent” for the Cash Component portion of the Additional Capital and Margins.


59

An Example of how Liquid BeES can be used by investors

Currently, if an investor sells shares on NSE, he adopts the following procedure:

1. Sell shares worth Rs. 1,00,000 on Monday (Day T)

2. The payout will normally take place on Wednesday (Day T+2).

3. The broker will issue a cheque for this amount to the investor after the payout i.e. on

Thursday (Day T+3).

4. The investor deposits this amount in his/ her bank on the next day (T+4).

5. The money will be available in the investor’s bank account only on next Monday

(T+7).

The investor does not earn any returns from the day he/ she sold to the day he/ she receives

payout i.e. 7 Days.

Let us say that instead, the investor adopts the following procedure using Liquid BeES:

1. Sells shares worth Rs. 1,00,000 on Monday (Day T)

2. Simultaneously buys Liquid BeES worth Rs. 1,00,000 on Monday (Day T)

3. On payout day, Wednesday (Day T+2), the payout from sale of shares will be netted

off against the payin for purchase of Liquid BeES.

4. The broker will not receive pay-out of funds for sale of shares.

5. Instead, the investor directly gets 100 units of Liquid BeES in his/ her demat account

on Wednesday (Day T+2).

6. He starts earning interest immediately from Day T+2

In short, the investor gets money market returns on Liquid BeES from the day he/ she

receives the units in his demat account i.e. T+2, instead of the earlier scenario when he got


60

funds in his bank account on T+7. Liquid BeES gives returns just like cash for him.

Similarly, if the same investor buys shares worth Rs. 1,00,000 on NSE on Monday

(Day T), he adopts the following procedure:

He/ she has to transfer funds into his broker’s account latest by Tuesday

(Day T+1).

He has to write a cheque to the broker by Monday (Day T) itself.

The investor loses interest on funds for at least 1 day, because he needs to transfer the funds

to the broker at least 1 day before the payout.

Instead, if the investor adopts the following procedure using liquid BeES, he

will get returns for one extra day:

1. Buy shares worth Rs. 1,00,000 on the next Monday,

2. Simultaneously sell Liquid BeES (he needs to own the units before selling) worth Rs.

1,00,000 on Monday (Day T).

3. On payout day, Wednesday (Day T+2), the payout from the sale of Liquid BeES will

be netted off against the pay-in for the purchase of shares.

4. The investor need not pay-in separate funds for purchase of shares but will receive

the shares

5. The investor will receive interest on the units of Liquid BeES till the day the units of

Liquid BeES remain in his/ her demat account i.e. Wednesday (Day T+2).


61

3. JUNIOR NIFTY BEES


The investment objective of Junior BeES is to provide returns that, before expenses, closely

correspond to the returns of securities as represented by the CNX Nifty Junior Index.

Junior BeES trades on the Capital Market segment of NSE. Each Junior BeES unit is

1/100th of the CNX Nifty Junior Index value. Junior BeES units are traded and settled in

dematerialised form like any other share in the rolling settlement.

Junior BeES


NSE symbol JUNIORBEES

Series EQ

Reuters code JBES.NS

Face value Rs. 10

Reuters JBES.NS

Bloomberg JBEES:IN


Entry/Exit Load NIL

Junior BeES

Allotment Date : February 21, 2003


NAV : Rs. 63.5256

Second Exchange Traded Fund (ETF) from Benchmark Asset

Management Company Pvt. Ltd

Tracks the CNX Nifty Junior Index (Currently no other Index Funds available on this

Index)


62

Each unit is priced at 1/100th of the CNX Nifty Junior Index



Minimum Lot-size for Real-Time Cash Creation / Redemption with the Fund is

16,000 units

Performance History of Junior BeES

As on 30th june 2008 Source: Benchmark


63

4. S&P CNX NIFTY UTI NOTIONAL DEPOSITORY RECIEPTS SCHEME(SUNDER)

S&P CNX NIFTY UTI NOTIONAL DEPOSITORY RECIEPTS SCHEME (SUNDER) is a

passively managed open-ended exchange traded fund, with the objective to provide

investment returns that, before expenses, closely correspond to the performance and yield

of the basket of securities underlying the S&P CNX NIFTY Index. SUNDER will have all

benefits of index funds such as diversification, low cost and a transparent portfolio and the

flexibility of trading like a share. Thus it provides the best features of both open-ended fund

and a listed stock.

SUNDER commenced trading on NSE on July 16, 2003.

ISIN code INF789F01042

NSE symbol UTISUNDER

Series EQ

Face value Rs. 100

Highlights

Face value of each units of SUNDER is Rs.100/-.

Valuation of each unit of SUNDER will be approximately 1/10th the value of S&P

CNX NIFTY.

SUNDER shares will traded on NSE in compulsory dematerialised form

Minimum trading lot for SUNDER share in the markets will be 1 unit.

Creation unit size (10,000 units plus multiples of 2,000 units in case of "Authorised

Participants" and 500,000 units plus multiples of 20,000 units for other investors)

NAV of SUNDER declared on a daily basis.

Initial expenses of the present scheme will be borne by UTI AMC.


64

3. BANK BEES: (An Open-ended Equity Exchange Traded Scheme)


The investment objective of Bank BeES is to provide returns that, before expenses, closely

correspond to the total returns of securities as represented by CNX Bank Index. Unit of

Bank BeES has a face value of Rs.10/- each and will be approximately equal to 1/10th of the

value of the CNX Bank Index. Bank BeES have benefits of index funds such as low cost and a

transparent portfolio.

Bank BeES

Allotment Date : May 27, 2004

Average AUM For The Month : Rs. 1,141.46 Cr.

NAV : Rs. 507.4955

Tracks the CNX Bank Index

CNX Bank Index consists of 12 key Banking Stocks

Each unit is priced at 1/10th of the CNX Bank Index



Minimum Lot-size for Real-Time Cash Creation / Redemption with the Fund is

10,000 units


NSE symbol BANKBEES

Series EQ

Reuters code BBES.NS

Face value Rs. 10

Bloomberg BBEES:IN



Entry/Exit Load NIL


65

Fund Performance History (%)


66

4. PSU Bank BeES - (An Open-ended Equity Exchange Traded Scheme)

Investment Objective: The investment objective of PSU Bank BeES is to provide returns

that, before expenses, closely correspond to the total returns of the securities as represented

by the CNX PSU Bank Index.

PSU Bank BeES

Allotment Date : October 25, 2007


Benchmark Index : CNX PSU Bank

Pricing (Per Unit) : 1/10th of Index

Minimum Lot : One unit/share


NSE symbol PSUBNKBEES

Reuters code PSUB.NS

Face value Rs. 10

Bloomberg PSUBBE:INEQUITY



Entry/Exit Load NIL


67

Fund Performance:

*CNX PSU Bank Index.


68

5. KOTAKPSUBK

AMC: Kotak Mahindra Asset Management Company Ltd.

Objective:

The investment objective of the scheme is to provide returns that closely correspond to

the total returns of CNX PSU Bank Index, subject to tracking errors.

Launch date: October 29, 2007

Scheme: Open-ended, gold exchange traded fund

The minimum investment amount is Rs 10,000 and in multiples of RS. 1000.

ISIN code INF373I01023

NSE symbol KOTAKPSUBK

Reuters code

Face value Rs. 10

Bloomberg KOPSUB:IN

Total Expense Ratio

Tracking Error

Entry NIL

Exit Load NIL

NAV returns

Duration 1 week 1 month 6 month 9 month 1 year

Percentage -4.57 21.08 -34.04 - -


69

6. KOTAK SENSEX ETF

AMC: Kotak Mahindra Asset Management Company Ltd.

Objective:

The investment objective of the scheme is to provide returns before expenses that closely

correspond to the total returns of the BSE SENSEX subject to tracking errors. Exchange

traded fund focusing on investing in the stocks that comprise the BSE SENSEX

Launch date: May 07, 2008


The minimum investment amount is Rs 10,000 and in multiples of RS. 1000.

ISIN code

BSE symbol KTKSENSEX

Reuters code

Face value Rs. 10

Bloomberg KOTSS:IN

Total Expense Ratio

Tracking Error

Entry 1% p.a

Exit Load NIL

NAV returns


Percentage -3.28 6.42 - - -


70

7. QNIFTY

Quantum Index Fund (QIF) - An Open Ended Exchange Traded Fund.

Objective:

The investment objective of the Quantum Index Fund is to provide returns that, before

expenses, closely correspond to the returns provided by the S & P CNX Nifty Index.

QIF tracks the S&P CNX NIFTY Index commonly known as NIFTY. 50 Indian stocks

across 21 sectors are represented in the NIFTY. Therefore, investors in QIF will have a

diversified exposure across stocks and sectors.

Launch date: July 18, 2008

Benchmark Index: S&P CNX NIFTY

Pricing (Per Unit): 1/10th of Index

Minimum Lot: One unit/share

ISIN code INF082J01028

NSE symbol QNIFTY

Reuters code N.A

Face value Rs. 10

Bloomberg QINDEX:IN

Total Expense Ratio 0.75%

Tracking Error

Entry 0.25% p.a

Exit Load NIL


71

8. RELBANK (Reliance Banking Exchange Traded Fund)

AMC: Reliance Capital Asset Management Ltd.

Objective:

The investment objective of Reliance Banking Exchange Traded Fund (RBETF) is to

provide returns that, before expenses, closely correspond to the total returns of the

securities as represented by the CNX Bank Index. However, the performance of Scheme

may differ from that of the underlying index due to tracking error.

Launch date: May 12, 2008

Scheme: Open-ended, exchange traded fund

Minimum investment amount: Rs 5,000


NSE symbol RELBANK

Reuters code

Face value Rs. 10

Bloomberg

Total Expense Ratio

Entry 2.25%

Exit Load NIL

NAV returns


Percentage -14.34 4.71 - - -


72

Gold ETF

Gold is one of the most valuable and universally accepted metals; its price movements are

keenly watched in global economics. Even today, after gold has been officially delinked from

currencies, it has a huge role to play in the global economy.

Widely considered to be an asset whose intrinsic value and purchasing power will not be

widely subjected to the vagaries of inflation. It is widely respected as a store of value. During

times of high inflation or depreciating currencies, people have turned to gold.

The economic factors which influence the value of gold is often contrarian to their impact on

other financial assets. Gold is used as an effective asset-allocation and diversification tool -

For instance, there is low to negative correlation between returns on gold and those on stock

markets.

Gold moves in a different direction…


73

…and is a hedge against inflation (Over the long term, Goldovershadows inflation)


74

…and holds true in uncertain times.

Society dislikes uncertainty. During times of national crises, emergencies, wars or

geopolitical strife, there is a rush to transfer assets into gold.


75

Gold ETF

Gold ETFs are investment vehicles that track the price of gold. The underlying

asset for the ETF is physical gold. So, the value of the ETF unit depends on

the underlying value of the gold.

Gold ETFs are designed to provide returns that, before expenses, closely

correspond to the returns provided by domestic price of Gold if held

physically.

It offers investors a smart way of investing in the gold bullion without the

necessity of actually physically holding gold and storing it. It is buying gold in

Demat form.

Since the fund is passively managed, the expenses are relatively lower, which

translates to better returns for the investors.

As it is listed on a stock exchange, any investor can buy it through his broker.

Gold ETF is an Exchange Traded Mutual Fund Unit listed and traded on a stock exchange.

Gold is the underlying asset for the units of that fund. Every Gold ETF Unit represents a

definite quantity of pure gold and the price of that Unit of Gold ETF moves with the price of

the actual gold metal being traded in the spot market or any metal exchange.

A fund house coming up with a Gold ETF appoints Authorized Participants who initially buy

the units of Gold ETF from the mutual fund by exchanging actual pure gold for the units of

Gold ETF. These Authorized Participants engage in secondary market trading of the Gold

ETF Units through the Stock Exchange, where investors can buy or sell gold units on

payment, for quantities as specified by the mutual fund in its offer document. The

underlying gold is kept with the fund house in the form of physical gold or gold receipt

which gives the right of ownership. Authorized participants can go back to the mutual fund

house to redeem the gold ETF Units and can demand equivalent value of actual pure gold at

any time.

India is the largest consumer of gold consuming nearly one third of total end use

consumption. India has been a sink for precious metals and gold purchases in India are

primarily driven by traditional jewellery demand. The outlook for Gold ETFs has become an


76

important factor to analyze their impact on the demand profile from India. Incremental

demand from ETFs can create a strong investment avenue for Indian gold investors.

The gold demand from India is dependent on both the gold prices and the price volatility.

The jewellery demand has been low when the price volatility is high. The primary demand

for jewellery is driven by customs and traditions so buyers try to time the markets and buy

their gold requirement when prices dip. On a broader platform the demand for gold and

gold jewellery is related to international prices, currency fluctuations, agricultural

production, and the number of marriages. The trend in investment in gold is evident from

the adjacent graph. The Net Retail Investment has shown an increasing trend with prices

rising to multi-year high levels. The retail investments have increased due to interest shown

by investors in profiting from higher gold price.

Large numbers of banks have come up with gold coins and buyers have flocked in to fulfill

their future jewellery needs. Gold investment demand in India is increasing both in tonnage

and currency value terms. Gold circulates within the system and roughly 30% of gold

jewellery fabrication is from recycled pieces. The jewellery demand in India has been driven

by other than social reasons also. One of the drives is the jewellery demand for investment

purpose. The Indian gold buyers have invariable kept gold in the form of jewellery to profit

from the price rise. The absence of hallmarked bars and other investment vehicles have

increased the demand for jewellery for investment. The increased investment in medals and

imitations coins by the Indian investors is evident of this phenomenon. Medals and

imitation coin demand has shown increase in 2006 also based on estimates. This healthy

trend in the investment demand augurs well for the Gold ETFs.


77

In general the medals and coins are later used to convert into jewellery and this is where the

efficiency of Gold ETFs comes into doubt. The Gold ETFs cannot provide physical gold to

the investors.

This is a very important bottleneck specifically in India. The Gold ETFs in other countries

have been very successful in attracting reluctant investors to the bullion markets. But the

reluctance of those investors was subjected to the problems in holding the yellow metal. The

investors wanted a way out for large storage cost and safety of their investment from theft.

The Indian Scenario is pretty much different. Indian investor buys gold in order to take

benefit of the price appreciation and at the same time to use the gold for their social

commitments.

Performance of two of the largest Gold ETFs i.e. Streettracks gold shares and Gold

bullion securities listed on NYSE, Singapore Exchange and LSE, Euronext Paris respectively

can been seen by the increase in their gold reserves. All the ETFs combined have tenth

largest reserves in the world. The higher the price goes there is higher probability of

redemption from these funds. If this progress is replicated in India then the Indian Gold

ETF can influence the prices in a much broader manner. However this performance has very


78

little probability of being repeated in the Indian markets as the main buying in expected to

come from tier-I Indian cities.


79

Why should an investor invest in Gold ETF?

No worry on adulteration

Gold provides diversification to the portfolio

Gold is considered as a Global Asset Class

Gold is used as a Hedge against Inflation

Gold is considered to be less volatile compared to equities

Held in Electronic Form

Store of value

Extremely Liquid

Advantages of Investing in Gold ETFs:

Potentially cheaper to have price exposure to gold price as compared to other

available avenues

Quick and convenient dealing through demat account

No storage and security issue for investors

Transparent pricing

Taxation of Mutual Fund

Can be traded on stock exchange like buying / selling a stock

Ideal for retail investor as minimum lot size to trade is one unit on secondary

market

NAV of a unit will track price of approximately ½ or 1 gram of gold

Taxation advantage in Gold ETF is being viewed as a major investment option. Physical

holding of gold attracts wealth tax on holding above Rs.15, 00,000. The Gold ETFs however

are exempt for this incremental tax treatment. If you hold physical gold for say 25lacs you

have to pay Rs. 10,000 as tax. The tax treatment on funds is also different. For physical gold

one has to pay short term capital gains tax on capital gains in less than three years which is

the marginal tax rate plus the surcharge. The long term capital gains tax is applicable for

capital gains after three years and tax rate is 20% with indexation benefits. The Gold ETFs

have an advantage over the physical metal in the sense that it comes under the SEBI


80

(Mutual Funds) Regulations, 1993. Gold ETFs are financial assets. Therefore the tax

treatment will involve short-term tax rate of 10% for capital gains before one year. The long

term capital gains remain zero.

Comparison of Gold ETF with Physical Gold


81

Risks Involved

Mutual Funds and Securities investments are subject to market risks and

there can be no assurance or guarantee that the objective of the scheme will

be achieved.

As with any investment in securities, the NAV (Net Asset Value) of the units

issued under the ETF can go up or down depending on the factors and forces

affecting the Bullion Market, Capital Market and Money Market.

The Past Performance of the fund house issuing the ETF should not be

construed for the future performance of the fund. It might not provide a basis

of comparison with other investments.

The name of the Gold ETF doesn’t indicate the quality of the scheme or its

future prospects and the returns. Investors should study the terms of offer

carefully and consult their investment advisor before investing the scheme.

ETFs are a new concept in India compared to other parts of the world.

The sponsor of the mutual fund is not responsible or liable for any loss or

shortfall resulting from the operation of the fund beyond the initial

contribution made by it of an amount of Rs 1 Lac towards setting up of the

Mutual Fund.

Investors are not offered any guaranteed or assured returns.

The scheme NAV will react to the Bullion Market movements. The investor

could lose money over short periods due to fluctuation in the schemes NAV in

response to factors such as economic and political developments, changes in

interest rates and perceived trends in Bullion market movements and over

longer periods during market downturns.


82

9. GOLD BEES : (Gold Benchmark Exchange Traded Scheme)

All data as of June 30, 2008

Investment Objective: The investment objective of Gold Benchmark Exchange

Traded Scheme (Gold BeES) is to provide returns that, before expenses, closely

correspond to the returns provided by domestic price of gold through physical gold.

Gold BeES:

Allotment Date : March 08, 2007


Benchmark Index : Domestic Price of Gold

NAV : Rs. 1,292.6601

Pricing (Per Unit) : Approximately 1 gram of Gold

Minimum Lot : 1 Unit


NSE symbol GOLDBEES

Reuters code GBES.NS

Face value Rs. 10

Bloomberg GBEES:INEQUITY


Entry/Exit Load NIL


83

10. UTI GOLDSHARE

UTI-Gold ETF is an exchange traded fund, passively tracks the performance of Gold Bullion.

The face value of UTI Goldshare is Rs 100/-

ETFs are bought/sold in two markets:

The primary market where large players also known as authorized

participants swap creation units for gold in physical form or in the form of

cash.

The secondary markets where the ETFs are traded like units of common

securities on the stock exchange(s) during the trading hours.

Objective:

The objective of the scheme is to provide investment returns that, before expenses, closely

correspond to the performance and yield of the gold prices or gold related instruments.

UTI Goldshare:

UTI Gold-ETF is an open-ended fund listed on National Stock Exchange in the form

of Exchange Traded Fund (ETF) tracking the Gold bullion.

UTI Gold-ETF is a passively managed open ended exchange traded fund designed to

track the performance and yield of the gold prices or gold related instruments.

Each UTI Goldshare unit represents an undivided ownership interest in the Scheme.

Minimum trading lot for UTI Goldshare units in the markets is 1 unit.

Investment Pattern

The investment policies of the scheme are as per SEBI (Mutual Fund) Regulations, 1996 and

within the following guideline. Under normal circumstances, the investment range would be

as follows:


84

* As mentioned by SEBI from time to time

As noted previsouly, gold ETFs were launched with much fanfare in India, starting with the

Benchmark Gold ETF (GOLDBEES.NS) and followed by UTI (GOLDSHARE.NS).

Unfortunately, they have gone in only one direction since: UTIGOL:IN (Bloomberg code)

Source: NSE India

Gold in US dollars has not weakened much, but the strong rupee has wiped out any upside

in domestic gold prices. No wonder that investor response has been muted so far: UTI MF

expects gradual gold fund demand.

Gold-traded mutual funds, though slow in taking-off, are expected to pick up in the next

two-three years as the yellow metal has proved to be the only safe investment, offering a 9%

return consistently in the long-term.


85

11. KOTAKGOLD

Kotak Mutual Fund has emerged as the third fund house, after Benchmark and UTI, to

launch a Gold Exchange Traded Fund.

Name of fund: Kotak Gold Exchange Traded Fund


Objective: Generate returns that should be in line with the returns on investment in

physical gold.

Asset allocation: Physical Gold: 90% - 100% / Debt and money market securities: 0%-

10%



NSE symbol KOTAKGOLD

Face value Rs. 100

Bloomberg KOGOLD:IN

Entry/Exit Load NIL


86

12. RELGOLD

AMC: Reliance Capital Asset Management Ltd.

Objective: The investment objective is to seek to provide returns that closely correspond to

returns provided by price of gold through investment in physical Gold (and Gold related

securities as permitted by Regulators from time to time). However, the performance of the

scheme may differ from that of the domestic prices of Gold due to expenses and or other

related factors.

Launch date: November 21, 2007




NSE symbol RELGOLD

Reuters code RELGOLD.NS

Face value Rs. 100

Bloomberg REGOLD:IN

Entry/Exit Load NIL

NAV returns


Percentage -0.16 -0.05 7.76 - -


87

15. QUANTUM GOLD EXCHANGE TRADED FUND

AMC: Quantum Asset Management Co. Pvt. Ltd.

Objective:

The investment objective of the scheme is to generate returns that are in line with the

performance of gold and gold related instruments, subject to tracking errors. QGF is

designed to provide returns that, before expenses, closely correspond to the returns

provided by Gold.

Each QGF unit is approximately equal to ½ gram of gold. Thus, even at the current prices of

approximately Rs. 1,200 per gram, an investor can buy gold in unit form for as low as Rs.

600. Investments by the fund will be made in physical gold which would be stored by the

custodian and also accompany adequate insurance cover.

Launch date: February 22, 2008


Minimum investment amount: Rs 5,000/ and in multiples of Rs 1,000/- thereafter.

ISIN code INF082J01010

Face value Rs. 100

Bloomberg QTGOLD:IN

Entry NIL

Exit Load 0.50%

NAV returns


Percentage -0.16 -0.05 - - -


88

ROAD BLOCKS IN INDIAN MARKET:

Till 2006-07 we had only 6 ETFs in Indian market based on Nifty and banks now we have 15

ETF available with us and this indicate towards the prosperous future of ETFs in India.

ETFs are new in Indian Market and have no track record of their performances just because

of this new investors are not interested in taking risk of investing in new investment

options, though ETFs are not new for the global world. Globally ETFs have performed very

well during the upside of the market, whereas during recession and downside movements of

market even most of the ETFs have failed in giving desired results to the investors though

their returns are better in comparison of stocks market. 2007-08 was the year of gold ETFs

in India most of the gold ETFs came to the Indian market during third and fourth quarter of

the financial year 2007-08. Unfortunately during this year US and other big economies were

badly suffered because of subprime crisis and after that depreciation of US$ then rise in the

oil prices, high inflation which has its impact on India economy also and ultimately affected

all the ETFs available in the market. Despite sluggish performance of equity market gold

ETFs were able to perform better than other investment instruments.

Only road blocks that I see in Indian market is high volatility, no track record and complex

economic rules and regulation of SEBI and RBI. According to my analysis what I see is

Indian market has huge potential and will be open to welcome more ETFs as soon as this

negative phase recovers.

One more ETF that will track the performance of the silver is in the pipeline and waiting for

the approval form SEBI. ETFs have emerged as a new face of investment globally and we are

almost ready to grab this opportunity.


89

MARKET PERFORMANCE:

Performance by Market Cap

All market cap ranges saw positive performance for the month, with Small Cap and Mid Cap

leading the way.

FIGURE 10: PERFORMANCE BY MARKET CAP

CATEGORY MAY RETURN (%) 2008 YTD RETURN (%)SMALL CAP 4.4 -1.0MID CAP 4.5 0.9LARGE CAP 1.8 -3.2TOTAL MARKET 2.1 -3.0

Performance is that of DJ Wilshire Indexes. Total Market is represented by the DJ Wilshire 5000 Index.


90

PERFORMANCE BY STYLE

Only Large Cap Value declined for the month.

FIGURE 11: PERFORMANCE BY STYLE

CATEGORY MAY RETURN (%) 2008 YTD RETURN (%)SMALL CAP VALUE 3.3 0.0SMALL CAP GROWTH 5.6 -1.8MID CAP VALUE 3.4 0.3MID CAP GROWTH 5.4 1.2LARGE CAP VALUE -0.5 -5.5LARGE CAP GROWTH 3.8 -1.1

Performance is that of DJ Wilshire Indexes.


91

PERFORMANCE BY SECTOR

Nine of the ten sectors rose with only Financials suffering losses in May.

Figure 12: Performance by Sector

CATEGORY MAY RETURN (%) 2008 YTD RETURN (%)

ENERGY 3.5 6.5

MATERIALS 4.8 7.2

INDUSTRIALS 1.0 -1.6

CONSUMER DISCRETIONARY 0.6 -1.3


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CATEGORY MAY RETURN (%) 2008 YTD RETURN (%)

CONSUMER STAPLES 1.4 -1.1

HEALTH CARE 2.0-8.3

FINANCIALS-6.1 -13.9

INFORMATION TECHNOLOGY 5.6-4.2

TELECOMMUNICATION SERVICES 3.4-6.5

UTILITIES 3.4-2.0

Performance is that of S&P 500 GICS Sector Indexes.


93

PERFORMANCE OF INDIAN ETFs AND THEIR FUTURE

PROSPECTUS:

The Maximum Returns (M O N D A Y , A U G U S T 1 1 , 2 0 0 8 )

When analyzed category wise, the maximum returns were delivered by the Gold ETFs, ahuge 25% return per annum.

Performance of different investment options:

Annual Return

Gold ETF 25.00%

S&P CNX Nifty 12.63%

Sensex 12.46

Equity FMCG 11.72

Equity banking 11.49%

BSE Small Cap 10.73%

Sectoral fund categories (Technology and Auto) have delivered negative returns to the tune

of 15.38% and 14.88% respectively.

A careful analysis of the performance of the existing 34 fund houses reveals that there are

schemes, which have offered returns higher than stock markets despite the market mayhem.

Interestingly, most of the outperformers are actually equity-based funds. And analysts are

hopeful about other equity-based funds will also bounce back soon.

Yet, the present market volatility cannot be ignored. Combined with a global economic

slowdown, fears of a US recession, deteriorating domestic fiscal scenario and of course, over

dependence on foreign fund flow, market pundits continue to point toward uncertain times,

and NAVs of major funds have crashed nearly 25-30%. Avers Ashok Jainani, VP, KSL, “The

markets have turned volatile and reacted sharply to the crisis in global financial markets

over the last three months… The NAVs of equity funds have dropped to reflect the

turbulence in equity markets worldwide.”


94

Performance History of BeES (as on 30th May, 2008)

6 Mths 1 Yr 3 Yrs 5 Yrs Since Inception

Nifty BeES (15.41)% 13.73% 34.58% 39.36% 28.65%

Junior BeES (28.28)% 2.06% 23.53% 38.47% 40.27%

Bank BeES (29.51)% 5.05% 25.08% - 28.45%

PSU Bank BeES (29.54)% - - - (18.84)%

Gold BeES 13.29% 23.73% - - 17.33%

Liquid BeES * 7.37% 6.78% 6.22% - 5.32%

* For Lquid BeES returns are based on Gross Dividend P.U.(Inclusive of Distribution Tax)declared by the Fund till May 30, 2008. Actual dividend in the hands of each investor willvary based on category and rate of dividend distribution tax applicable thereon. Returns forall the period are annualized. Returns for less than one year are absolute and more than oneyear are compounded annualized.

Performance of Gold ETF: (As on 31 – July - 2008)Those have invested in India’s Gold ETFs are a happy lot these days, as

returns from these funds have performed much better than several stocks

in the country’s stock exchanges.

Analysts said Gold ETFs are the only product in the mutual funds

category that has outperformed Sensex return as all other thematic funds.

Data available from the Bombay Stock Exchange show that Gold ETFs have given a return of

5.22% in the last one-month (July 2008), while the 30-share Sensex of BSE during the same

period has given only 4% return.

Currently, there are three fund houses that are offering Gold ETFs. While UTI MF and

Kotak MFs' Gold ETF has given 5.23% return, the Gold ETF from Benchmark Asset

Management stable has given a return of 5.21%.

Gold ETF is a new investment option that is likely to create a wave, challenging the best

known investment options like mutual funds and equity markets.


95

Glittering gold has overshadowed all other asset classes this year and shimmering to glory

are the Gold Exchange-Traded Funds (ETFs) that came into the market only last year and

mirror gold returns. But it has not yet found many takers as compared to physical gold

Gold ETFs were first launched in March 2007 and completed a year of phenomenal rally

thanks to mounting gold prices. As these funds trade on the underlined price of gold, they

have given average returns as high as 24% in the last one year with the precious metal

appreciating from 10,000 levels for 10 grams of gold to 13,500 levels this year. As the

demand-supply mismatch continues, the prices are expected to rise.

India is one of the largest consumers of gold. Nearly 800 tonne of gold is imported every

year. Indians account for 23% of the world’s total annual demand for gold. While

conventional investment options like jewellery, gold bars and coins still exist, Gold ETFs are

another effective way to invest in the yellow metal. But while demand of gold has risen 15%

YoY, gold ETFs have still found few takers even after much fanfare.

Dharmesh Sodah, Director, World Gold Council said, its a new product which is being

introduced into the market. A substantial amount of work still needs to be done in terms of

getting more awareness. I am sure consumers would see the merits and look at Gold ETFs

as a very attractive investment option.

"There needs to be a remarkable change in the mindset of investors that I can also hold gold

in the paper form. And that, we believe will take a couple of years," said Lakshmi Iyer, VP

and Head Product, Kotak Mutual Fund.

Experts say if you are looking at gold as an asset class purely for investment, Gold ETFs

prove to be a much more investor friendly option and are expected to address issues of

higher prices of physical gold, purity and cost of insurance.

The advantage of gold ETF firstly is easy buying and selling. Typically, if you want to buy

physical gold, you have to go somewhere else. The second advantage is storing. If you buy

physical gold, you have to store in your house. Thirdly, you can do transactions on

denomination in Gold ETF because here you can buy even one unit. While in physical gold

buying1 gram and adding them is painful because you have to melt it to make a bigger coin

or bar and that takes away some value out of it, said Rajan Mehta, ED, Benchmark MF.

However, trading gold ETF units differ in a few ways from trading company’s shares. Since

it’s a commodities transaction, Securities Transaction Tax (STT) is not applicable. Also, gold

is held by an investor in the dematerialized form or in units. Hence, no wealth tax is levied


96

which is applicable when physical gold exceed Rs 15 lakh. However, gold ETF is a non-

equity scheme and would attract a Dividend Distribution Tax (DTT). As per the current

norms, a DTT of 14% of the dividend would be applicable for individuals and 22.4% for

corporate and institutional investors.

"Right now, under the legislation, gold is considered under the non-equity category. So, debt

fund taxation would be applicable in them. For physical gold, the short-term capital gains

tax will be applicable till three years of holding. But in gold ETF, for short-term capital gains

tax to be applicable, the holding period is only 1 year. So, the incidence of taxation in gold

ETF is much lower," added Lakshmi Iyer.


97

Suggestions from Institutional Investors:

Sometimes you are confident that an industry group is poised for a rebound, but you are not

sure which stocks to buy to best take advantage of that rebound. There is always the risk

that a company-specific problem will prevent a particular stock from participating as its

industry group rises.

One way to avoid that risk is by buying a broad basket of stocks from across the industry,

and one of the most efficient ways to do that is with an exchange-traded fund.

Because ETFs are not constantly buying and selling the underlying shares, they rarely

generate capital gains or losses for the ETF holders. Also, most ETFs passively invest in an

index or a specified group of stocks, and so they have a very low fee structure.

Of course, there are disadvantages to ETFs that must be considered. Because it is a stock

traded on an exchange, you must pay a brokerage commission every time you buy or sell an

ETF. Also, thin trading volumes in some ETFs can lead to wide bid/ask spreads and

increased transaction costs. As a result, investors who want to actively trade in and out of

positions might be better off with a no-load mutual fund or some other vehicle.

Barclays is the largest provider in the ETF marketplace, and its ETFs are among the most

actively traded. They are also well constructed to accurately mimic the performance of the

underlying index or industry group.

iShares S&P GSTI Networking Index. The iShares S&P GSTI Networking Index is a good

proxy for the telecom equipment industry. The inclusion of Qualcomm and Research in

Motion have led to better performance than a pure equipment index, but it also includes

Motorola, Tellabs, JDS Uniphase, Juniper Networks, Corning and Cisco Systems among its

top 10 holdings.

The telecom equipment industry suffered from an enormous overcapacity at the beginning

of the decade, which led to a painful and prolonged retrenchment. But with industry

capacity normalizing and demand for bandwidth inexorably rising, only the timing of the

industry's rebound is in question.


98

iShares Dow Jones US Telecommunications. The telecommunications service providers

have also been in turmoil as wireless and cable-based systems compete with the traditional

telephone landline. But turmoil creates opportunity, and many of the telecom companies

have very strong franchises. The iShares Telecom ETF is somewhat dominated by AT&T and

Verizon Communications, with 38 per cent of the index, but it still provides sufficient

diversification across the sector.

iShares S&P GSTI Semiconductor Index. The semiconductor industry is notoriously cyclical

and, if anything, has become more so in recent years. It could be nearing the bottom of a

major trough, as technology spending is likely to increase in the coming years. The iShares

Semiconductor Index provides good coverage across both the chip makers and their

suppliers, from Intel and Texas Instruments to Applied Materials and KLA-Tencor.

Three that look particularly interesting are the iShares Dow Jones U.S. Financial Sector

Index, which holds many of the major national banks and leading investment banks; the

iShares Dow Jones US Broker-Dealers Index, which is more focused on the investment

banks and brokerage houses; and the iShares Dow Jones US Regional Banks Index Fund,

which, as the name suggests, gives you exposure to the smaller, more localized banks.


99

10 BEST BY ETFs:

Many investors prefer more diversified, packaged products, like exchange-traded funds and

mutual funds, over individual stocks. When it comes to ETFs there are now hundreds to

choose from. Forbes editors polled the smartest investment minds for their top picks for

2008. Here are ten worth considering.

1. Fidelity China Region (FHKCX)

Focus: Chinese equities

12-Month Return: 43.2%

2. iShares S&P Global Telecommunications (nyse: IXP)

Focus: Global telecom stocks


3. ING Global Real Estate (IGLAX)

Focus: Global real estate companies & REITs

12-Month Return: -6.9%

4. WisdomTree DEFA (nyse: DWM)

Focus: Dividend stocks, Europe, Asia and Australia


5. Health Shares Diagnostic (nyse: HHD)

Focus: ETF covering pharma, healthcare service, life sciences and biotech

Three-Month Return: 4.8%


100

6. StreetTracks Gold Shares (nyse: GLD)

Focus: ETF focusing on gold stocks


7. Spectra N (SPECX)

Focus: Mutual fund focusing on "high unit volume growth and positive life cycle"

stocks


8. Ultra QQQ ProShares (amex: QLD)

Focus: ETF which doubles the performance of the Nasdaq 100


9. Rydex Sector Rotation (RYSRX)

Focus: Quant fund which invests in top industries ranked by momentum


10.New Ireleand Fund (nyse: IRL)

Focus: Closed end fund investing in Irish securities

12-Month Return: -18.2%


101

LIMITATIONS:

“Exchange Traded Funds” is a very wide topic in itself and time period was

not sufficient to understand terms and conditions of such a complex

instrument. This report is based on the limited information gathered from

magazines, newspapers and internet.

As far as Indian ETFs are concerned no track record is there and market is

also underdeveloped and hence there is unavailability of sufficient

information.

Risk factor is crucial part of any investment decision of the investor but

this report doesn’t speak in terms of value of risk in different Exchange

Traded Funds available in the market.

Charts of returns/performances are based on the historical data and

cannot ensure the same returns in future.


102

Appendices


103

PERFORMANCE TABLE

By Issuer:

National Stock Exchange (NSX) data on the performance of ETFs (April2008)

Assets ($Mil) Net Cash Flow($Mil)

Notional TradingVol ($Mil)

By Issuer 7-Apr 8-Apr YTD '08 8-Apr YTD '08 8-Apr

BGI/iShares 278,910 321,169 1,585 6,916 1,708,550 346,587

SSgA 103,311 141,434 -12,741 -10,145 3,679,225 797,006

Vanguard 29,272 47,920 7,303 1,387 48,588 10,073

Invesco/PowerShares 29,981 38,626 970 276 663,972 125,793

ProFunds 4,775 16,818 8,059 2,007 686,569 174,063

Bank of NY 9,136 8,626 -1,345 -360 65,165 17,485

Merrill (HOLDRs) 8,873 6,732 -233 -1,126 237,813 58,457

Rydex 4,862 5,993 481 -4 17,007 4,678

Van Eck 743 5,444 1,943 212 26,950 5,803

Wisdom Tree 3,685 4,641 280 145 5,732 1,089

Claymore 529 2,002 179 124 3,529 720Ameristock/VictoriaBay 1,010 1,224 -174 -58 41,868 14,863

First Trust 618 981 52 53 950 221

MacroShares 42 340 280 174 629 484

X-Shares 71 231 16 15 290 54

Goldman Sachs 0 203 0 0 82 16

Fidelity 119 104 -1 18 747 443

Bear Stearns 0 50 0 0 0 0


104

Northern Trust 0 31 31 31 12 12

Greenhaven 0 30 30 0 84 19

FocusShares 0 24 0 0 51 3

SPA 0 17 4 0 28 10

RevenueShares 0 15 15 0 23 13

Ziegler 4 5 -2 0 8 1

ETF Total 475,942 602,662 6,732 -334 7,187,874 1,557,894

Category wise:



By Category 7-Apr 8-Apr YTD '08 8-Apr YTD '08 8-Apr

Domestic Equity304,277 353,487 -4,685 -5,347 6,129,238 1,317,410

Global/InternationalEquity 130,480 174,202 1,850 3,841 817,223 174,224

Fixed Income 23,397 42,090 7,046 2,076 58,737 14,567

Commodity/Currency 19,891 39,018 4,261 -534 192,497 54,115

Total 478,046 608,797 8,473 36 7,197,695 1,560,316


105

Top 10 ETFs by Size:



Top 10 ETFs by Size 7-Apr 8-Apr YTD '08 8-Apr YTD '08 8-Apr

SPDR Index 500 60,036 75,121 -19,137 -8,491 2,733,321 584,966

iShares MSCI-EAFE 44,619 47,363 -2,383 -488 84,041 18,480

iShares MSCI-Emerging Mkts 16,159 26,285 -1,568 274 268,728 47,894

iShares S&P 500 19,506 18,994 1,790 1,721 36,705 8,651

PowerShares QQQ 17,126 17,727 -1,799 -585 633,166 119,077

SPDR Equity Gold 10,735 16,247 -1,339 -1,780 95,956 24,189

iShares Russell 1000Gr 9,155 13,447 -1,271 -81 17,705 3,434

iShares Russell 2000 10,252 10,485 546 -273 539,248 99,015

Vanguard MSCI TotalMarket 8,102 10,422 713 116 7,463 1,178

iShares Lehman 1-3 YrTreas 5,893 9,279 -387 -193 7,523 1,741


106

TOP US ETFS BY ASSETS (AS OF MAY 31, 2008)

ETF TICKERASSETS

(MM)MARKET SHARE

(%)S&P 500 SPDR SPY $77,079 12.6

ISHARES MSCI EAFE EFA $47,683 7.8

ISHARES MSCI EMEEM $27,347 4.5

NASDAQ-100 INDEX TRACKINGSTOCK

QQQQ $17,581 2.9

SPDR GOLD SHARES GLD $17,000 2.8

ISHARES S&P 500 IVV $16,692 2.7

ISHARES RUSSELL 1000 GROWTH IWF $14,033 2.3

VANGUARD TOTAL STOCKMARKET

VTI $10,790 1.8

ISHARES RUSSELL 2000 IWM $10,073 1.6

ISHARES MSCI-BRAZIL EWZ $9,830 1.6


107

ETF Short Interest

Aggregate short interest in the US ETF market was little changed at approximately 21% oftotal assets.

Short interest declined in Small Cap, down 5.6%. Energy short interest rose 17.2% to 57.8%.

FIGURE 8: ETF SHORT INTEREST BY ASSET CLASS (AS OF MAY 15, 2008)

CATEGORY ASSETS (MM) SHORT (MM) SHORTINTEREST (%)

MONTHLYCHANGE (%)

BROAD $16,347 $1,453 8.9 -0.1

COMMODITY $32,038 $2,907 9.1 1.4

CURRENCY $5,009 $453 9.0 -2.4

DIVIDEND/FUNDAMENTAL $13,612 $159 1.2 0.2

FIXED INCOME $43,035 $1,993 4.6 -1.4

GLOBAL $5,715 $245 4.3 1.2

INTERNATIONAL $165,997 $14,912 9.0 -0.3

INVERSE/LEVERAGED $18,089 $1,014 5.6 0.7

SECTOR $61,993 $23,981 38.7 5.0

SIZE $170,163 $81,108 47.7 4.1

SPECIALTY $10,423 $279 2.7 -0.2

STYLE $69,322 $2,141 3.1 -0.2

SUB-CATEGORY ASSETS(MM)

SHORT(MM)

SHORTINTEREST (%)

MONTHLYCHANGE (%)

BROAD $16,347 $1,453 8.9 -0.1

COMMODITY $32,038 $2,907 9.1 1.4


108

SUB-CATEGORYASSETS

(MM)SHORT(MM)

SHORTINTEREST (%)

MONTHLYCHANGE (%)

CURRENCY $5,009 $453 9.0 -2.4

DIVIDEND/FUNDAMENTAL $13,612 $159 1.2 0.2

FIXED INCOME $43,035 $1,993 4.6 -1.4

GLOBAL $5,715 $245 4.3 1.2

INTERNATIONAL - DEVELOPED $93,707 $3,660 3.9 -0.3

INTERNATIONAL - EMERGING $72,290 $11,252 15.6 -0.6

INVERSE/LEVERAGED $18,089 $1,014 5.6 0.7

SECTOR - CONSUMER DISCRETIONARY $2,177 $1,236 56.8 14.0

SECTOR - CONSUMER STAPLES $3,505 $1,002 28.6 -0.9

SECTOR – ENERGY $11,960 $6,917 57.8 17.2

SECTOR – FINANCIALS $9,732 $5,674 58.3 9.4

SECTOR - HEALTH CARE $5,215 $414 7.9 0.4

SECTOR – INDUSTRIALS $3,802 $1,260 33.1 -10.4

SECTOR – MATERIAL $4,914 $1,665 33.9 0.6

SECTOR – REIT $7,874 $3,709 47.1 8.4

SECTOR – TECHNOLOGY $9,236 $1,535 16.6 1.1

SECTOR – UTILITIES $3,578 $569 15.9 -3.3

SIZE - LARGE CAP $132,467 $58,655 44.3 4.5

SIZE - MICRO CAP $396 $100 25.2 -4.3

SIZE - MID CAP $20,057 $2,516 12.5 2.3

SIZE - SMALL CAP $17,243 $19,837 115.0 -5.6

SPECIALTY – DOMESTIC $3,786 $78 2.1 -0.3

SPECIALTY - INTERNATIONAL $6,637 $200 3.0 -0.2

STYLE - ALLCAP GROWTH $364 $12 3.2 -0.6

STYLE - ALLCAP VALUE $619 $12 2.0 -1.7


109

SUB-CATEGORYASSETS

(MM)SHORT(MM)

SHORTINTEREST (%)

MONTHLYCHANGE (%)

STYLE - LARGE GROWTH $25,696 $283 1.1 0.2

STYLE - LARGE VALUE $16,434 $263 1.6 -0.3

STYLE - MID GROWTH $7,084 $180 2.5 1.0

STYLE - MID VALUE $6,285 $68 1.1 0.4

STYLE - SMALL GROWTH $5,990 $731 12.2 -3.9

STYLE - SMALL VALUE $6,850 $592 8.6 -1.2


110

COMPARISON TABLE OF INDIAN ETFS

ETF Report as on November 24, 2007

Scheme Name

NAV (23-Nov-2007)

ExpenseRatio (30-

09-07)

Simple Annualised Return (%)

1 Year 3 YearsSinceInception

Bank BeES899.5 0.55 44.5 69.2 72.9

Gold BeES1043.49 1 -- -- 14.5

ICICI SENSEX PrudentialETF

192.92 0.8 37.4 71.2 97.4

Junior BeES111.39 1 54.8 63.1 110.2

Kotak Gold ETF1046.57 -- -- -- 53.1

Liquid BeES1000 0.7 0 0 0

Nifty BeES567.06 0.8 40.8 64.5 75

PSU Bank BeES293.74 -- -- -- 34522.1

Reliance Gold ETF -Dividend

1039.7 -- -- -- 15590.5

Reliance Gold ETF - Growth-- -- -- -- --

UTI's SUNDER575.53 0.5 43.5 66.3 108.5

UTI Gold ETF1045.28

-- -- -- 6.6


111

References

Related websites1. www.benchmarkfunds.com

2. www.nse-india.com

3. www.bseindia.com

4. www.bloomberg.com

5. www.reuters.com

6. www.etfconnect.com

7. www.vanguard.com

8. www.etftrends.com

9. www.ssgafunds.com

10. www.nasdaq.com

11. www.galatime.com

12. www.ranjanblog.com

13. www.quantumamc.com

14. www.rediff.com/money/2008/may/17forbes2.htm

15. finance.yahoo.com

16. www.moneycontrol.com

17. economictimes.indiatimes.com

18. www.business-standard.com

19. www.valueresearchonline.com

20.www.thehindubusinessline

21. www.tradersedgeindia.com

exchange traded funds - a new face of investment in india- by deepak

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