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Opinion Piece: Seeking high yield through ETFs
An efficient alternative to boost dividend income in an investment portfolio would be to
include a High Yielding Exchange Traded Funds. Exchange Traded Funds have made it
extraordinarily easy to gain a diversified, cost and tax effective portfolio of high yielding
assets.
Presently, there are 8 Exchange Traded Funds offering domestic high yield exposure
listed on the ASX. Each Exchange Traded Fund applies a quantitative and qualitative
overlay that has certain nuances. Therefore, we have presented this report to highlight
the key differentiators between these Exchange Traded Funds.
(continued page 2).
Market Update
Exchange Traded Product (ETP) global assets under management grew 6.0% to
US$2.945tn over the last six months. Net new inflows delivered US$146.1bn, an 18.2%
increase from prior corresponding period - with a strong 1Q15 before momentum slowed
in 2Q15.
(continued page 7).
ETFs: Own the index in a single listed security
Key attributes:
� Simple, liquid and flexible way to secure exposure to a specific index, sector, fixed
income, commodity or currency;
� Low fees as compared to Managed Funds (Domestic Equity Management Expense
Ratio (MER) 15-55 bp, International Equity MER 7-72 bp, Fixed Income MER 20-28
bp, Cash MER 18 bp, Commodity MER 39-49 bp, Currency MER 45 bp, Other MER
119 bp);
� Distribute dividends or coupons based on the underlying investments including
franking credits, interest, and capital gains on a proportional basis;
� Trade at or very close to their net asset value and exhibit less investment manager
or individual security risk;
� Own a claim to the underlying shares in the portfolio that are held with a custodian.
There are also key risks investors must consider. These include managing currency
exposure (international, commodities) and overall share market risk, based on various
economic conditions and global events.
Inside this edition
� Opinion Piece
� Market update
� Summary Information
Index
Opinion Piece 2
Market Update 7
ETF Summary Information 9
Domestic ETFs 10
International ETFs 11
FI, Commodity and Currency ETFs 13
Appendix A: How ETFs work 14
Appendix B: Physical versus Synthetic 15
Appendix C: International Exchange Opening Hours
16
Appendix D: Market Making Quoting Obligations
17
Appendix E: Glossary 18
EXCHANGE TRADED FUNDS.
July Quarter 2015
Nathan Umapathy [email protected]
Bell Potter Securities Limited [email protected]
www.bellpotter.com.au
ABN 25 006 390 772
AFSL no. 243480
03 September 2015
ABRIDGED
EXCHANGE TRADED FUNDS.
2
Opinion Piece
Seeking high yield through ETFs
The recent months have continued to present challenges for the Australian equity market. And while concerns in
Europe seems to have eased a little, the uncertainty of an interest rate rise in US and a slowdown in the Chinese
economy have all been a key catalyst over the recent slump on the ASX200.
Although investors are understandably anxious of the current stock market, the desire for yield remains unabated.
The potential of the RBA to cut rates further in attempt to counter any interest rate changes done in US – would mean
that term deposits would no longer be the yield-delivering mechanism that investors crave for.
A much more efficient alternative to boost dividend income in an investment portfolio would be to include a High
Yielding ETF. Structurally similar to an index fund but listed on the ASX, ETFs have made it extraordinarily easy to
gain a diversified, cost and tax effective portfolio of high yielding assets. Presently there are 8 ETFs offering domestic
high yield exposure listed on our exchange. Therefore, we have presented this report to highlight the key
differentiators between these ETFs.
With respect to its relative investment methodology, we have categorised the 8 Domestic ETFs into 2 broad
categories – an Index Driven ETF, which tracks an Index of top yielding ASX companies, and a Style Driven ETF,
which employs a quasi active investment strategy to enhance yield.
Index Driven ETF
There are 6 ETFs offering a diversified portfolio of high yield assets exposure under this category. These listed
securities trade under the following ASX codes IHD (iShares), RDV (Russell), SYI (State Street), VHY (Vanguard),
DIV (UBS) and ZYAU (ANZ). Each index applies a quantitative and qualitative overlay that has certain nuances.
Analysis of sector exposures as compared against the ASX200 notes:
� IHD has substantial overweight positons in Materials, Telecommunications, Energy, Utilities and the lowest
exposure to Financials;
� RDV has the largest exposure to Financials however is materially underweight in Materials and Health Care;
� VHY has a substantial overweight position in both Utilities and Consumer Discretionary;
� SYI has the lowest exposure to Industrials;
� DIV is substantially overweight in Consumer Discretionary and has zero Telecommunication exposure;
� ZYAU is the only ETF with an overweight position in Industrials and has no Consumer Staples exposure.
Other key notes from these 6 High Yield ETFs:
� RDV has the lowest historical yield (5.11%) while SYI has the highest historical yield (7.17%);
� Average historical yield amongst the 5 ETFs (ZYAU only recently listed) is 6.3%;
� VHY has the lowest management fee (25bp) while DIV has the highest management fee (70bp);
� DIV’s portfolio is rebalanced quarterly while the other 5 ETFs is rebalanced semi annually;
� Both VHY and DIV has the largest dispersion of securities with the largest focus outside the ASX50;
� ZYAU is the only ETF that doesn’t hold any of the big four banks.
All six ETFs are fully replicated, with the underlying investments held with a custodian in a segregated account.
Please be aware this analysis is based on historical data which will change with the recalibration of the underlying
indices and natural oscillations of the market.
EXCHANGE TRADED FUNDS.
3
Opinion Piece (continued)
Description
ASX Code
Manager
Index Methodology
Exposure Constraints
Metrics
Historical Yield (LTM)
Franking (LTM)
Gross Yield (LTM)
Distribution Freq
Indirect Cost Ratio
Portfolio Rebalance Semi-Annual Semi-Annual Semi-Annual
Number of Holdings
Top 10
BHP Billiton 10.0% Commonwealth Bank 15.8% Westpac Bank 9.7%
Telstra 9.9% Westpac 15.6% Commonwealth Bank 9.5%
Commonwealth Bank 8.8% ANZ Bank 15.4% ANZ Bank 9.1%
Rio Tinto 8.2% Telstra Corporation 12.2% BHP Billiton 8.0%
Wesfarmers 7.6% National Australia Bank 6.0% Suncorp Group 4.9%
Woodside Petroleum 7.6% BHP Billiton 4.1% Telstra 4.7%
Westpac 7.4% Suncorp Group 3.8% Amcor 4.7%
National Australia Bank 6.4% Wesfarmers 3.5% Woodside Petroleum 4.6%
ANZ Bank 6.3% IAG 2.6% National Australia Bank 4.6%
Spark NZ 2.7% BEN Bank 2.3% Woolworths 4.6%
Sector Exposure
Financials 35.8% Financials 52.1% Financials 50.1%
Materials 21.8% Materials 7.3% Materials 15.4%
Industrial 4.6% Industrial 6.5% Industrial 2.1%
Consumer Staples 7.8% Consumer Staples 8.3% Consumer Staples 8.9%
Health Care 1.2% Health Care 0.5% Health Care 2.4%
Telecom Serv 12.9% Telecom Serv 7.0% Telecom Serv 4.7%
Energy 8.7% Energy 4.9% Energy 5.2%
Consumer Discretionary 1.8% Consumer Discretionary 4.8% Consumer Discretionary 4.3%
Utilities 4.1% Utilities 4.2% Utilities 6.5%
IT 0.0% IT 0.0% IT 0.4%
Other 0.0% Other 4.4% Other 0.0%
Georgraphic Exposure
Australia 100.0% Australia 100.0% Australia 100.0%
Capped @ 10% per security
Capped @ 30 - 40% per sector
n/a
n/a
6.03% 5.11%
IHD RDV
The Index employs a yield driven
weighting scheme while providing
diversification across individual stocks
and sectors. Stocks need to have a
market cap of above $500m with a 6
month Average Daily Volume Traded of
$2m before a stability filter is applied,
which looks at dividend consistency and
price momentums.
The Index aims to deliver income through
higher dividends and franking credits,
plus capital growth to investors through a
diversified portfolio of blue chip Australian
shares. The Index has a bias toward
those that have a high expected dividend
yield but also meet other characteristics
including; a history of paying high
dividends; dividend growth and consistent
earnings.
iShares Russell Investments
0.30% 0.34%
50 49
46.50% 80.30%
7.20% 6.90%
Quarterly Quarterly
SYI
The Index targets Australian companies
with high dividend yields that are both
sustainable and persistent. Index
construction starts with a dividend
screening process: only securities with a
track record of consistent dividend
payments and with the capacity to
sustain dividend payouts into the future
are eligible index constituents. From this
list of eligible companies, the index
selects only those with higher than
average dividend yields.
State Street
8.90%
Quarterly
0.35%
7.17%
56.60%
Capped @ 10% per security
n/a
Data as at 31/07/2015 Data as at 30/06/2015 Data as at 31/07/2015
36
Data as at 31/07/2015 Data as at 30/06/2015 Data as at 31/07/2015
EXCHANGE TRADED FUNDS.
4
Opinion Piece (continued)
Description
ASX Code
Manager
Index Methodology
Exposure Constraints
Metrics
Historical Yield (LTM)
Franking (LTM)
Gross Yield (LTM)
Distribution Freq
Indirect Cost Ratio
Portfolio Rebalance Semi-Annual Quarterly Semi-Annual
Number of Holdings
Top 10
Telstra n/a Commonwealth Bank 10.9% Woodside Petroleum 10.4%
ANZ Bank n/a ANZ Bank 9.8% Telstra 10.3%
National Australia Bank n/a Westpac 7.6% BHP Billiton 9.4%
Rio Tinto n/a Wesfarmers 7.4% AMP 8.9%
BHP Billiton n/a Woodside 5.2% Amcor 7.6%
Westpac n/a Rio Tinto 5.2% Sydney Airport 5.7%
Commonwealth Bank n/a AGL 3.4% Lend Lease Group 4.2%
Tabcorp Holdings n/a Sonic Healthcare 2.9% Stockland 4.1%
Duet Group n/a Bank of Queensland 2.8% ASX 3.4%
Spark Infrastructure n/a Bendigo and Adelaide Bank 2.5% Goodman Group 3.2%
Sector Exposure
Financials 41.9% Financials 38.8% Financials 38.2%
Materials 19.3% Materials 14.0% Materials 19.5%
Industrial 6.1% Industrial 3.7% Industrial 8.1%
Consumer Staples 0.9% Consumer Staples 7.4% Consumer Staples 0.0%
Health Care 0.0% Health Care 5.8% Health Care 4.9%
Telecom Serv 10.2% Telecom Serv 0.0% Telecom Serv 10.5%
Energy 2.1% Energy 5.2% Energy 10.4%
Consumer Discretionary 11.5% Consumer Discretionary 16.6% Consumer Discretionary 5.5%
Utilities 8.0% Utilities 6.2% Utilities 1.9%
IT 0.0% IT 0.0% IT 1.0%
Other 0.0% Other 2.3% Other 0.0%
Georgraphic Exposure
Australia 100.0% Australia 100.0% Australia 100.0%
ANZ ETFS
VHY
Market capitalisation weighted index
comprising of companies with a higher
forecast div yield, relative to other
companies listed on the ASX. A-REITS
and securities that are not forecast to pay
dividends over the next 12 months are
excluded from the Index. Then the
securities with the highest forecast div
yields which make up 50% of the float-
adjusted market capitalisation of the Index
are selected.
Vanguard
DIV
The Index is a rules-based customised
index of listed Australian securities that
have “Buy” or “Neutral” UBS Research
rating. The index screens for securities
through its financial statement filters and
forecast divided yield filter, while
excluding securities with nil dividends or
securities with a high probability of
default.
Not Disclosed
6.86%
57.80%
8.60%
Quarterly
0.25%
Capped @ 10% per security
Capped @ 40% per sector
UBS
n/a
n/a
n/a
Quarterly
0.35%
40
ZYAU
The Index is designed to measure the
performance of the top 40 companies in
the ASX 300 with the highest shareholder
yields. The index screens for companies
with a minimum three-month Average
Daily Value Traded of AUD 1 mil; a Free
Cash Flow to Equity of at least the total
cash paid for common dividend and
common share repurchases; a positive
div payout and a non-negative DPS
growth.
Capped @ 10% per security
n/a
6.26%
66.31%
8.00%
Quarterly
0.70%
Data as at 30/06/2015 Data as at 30/06/2015 Data as at 31/07/2015
4036
Data as at 30/06/2015 Data as at 30/06/2015 Data as at 31/07/2015
EXCHANGE TRADED FUNDS.
5
Opinion Piece (continued)
Style Driven ETF
BetaShare’s YMAX and HVST have a slightly more sophisticated strategy than traditionally investing in your top
yielding companies.
YMAX provides shareholders an exposure to the ASX20 with a dividend income that exceeds the dividend income of
the Portfolio of underlying stocks. This yield enhancer comes from the additional premium the portfolio receives from
selling covered calls options over up to 100% of the Portfolio.
Other key notes on YMAX:
� The amount of option premiums in the Fund receives from writing covered call options depends on, among
other factors, the expected volatility of the price of the Securities;
� The higher the expected volatility, the higher the option premiums;
� YMAX has the ability to outperform a traditional S&P/ASX 20 Buy/Hold strategy in a period of above average
volatility, particularly in a falling, flat or moderately rising market.
While, HVST is an equity income strategy, which seeks to maximise dividend yield by investing in a portfolio of
dividend paying Australian equities. HVST has an additional investment objective to cushion downside risk and
manage the volatility of the fund by selling equity futures contracts (i.e. ASX SPI 200 futures).
Other key notes on HVST:
� HVST will provide exposure to 14 or more securities;
� The portfolio will generally consist of large capitalisation Australian securities;
� The portfolio is rebalanced approximately every two months in order to obtain the next paying dividend
(‘dividend harvest’ strategy) and to comply with the ’45 day rule’ (in order to receive franking credits);
� At each portfolio rebalance, BetaShares will identify the largest 50 securities, by market capitalisation, listed
on the ASX, that are expected to give the holder an entitlement to the dividend and which exceeds a
minimum gross yield threshold. Securities are then ranked from highest to lowest based on expected gross
yield, which is based on declared dividends or Bloomberg analyst consensus;
� May invest in one or more domestic broad based ETF if fewer than 14 stocks meet its minimum yield and
market capitalisation screens.
Overall, it is important to note that both these ETFs are aimed to generate income rather than capital growth.
Therefore, these ETFs has the capacity to underperform during a strong bull market.
Please be aware this analysis is based on historical data which will change with the recalibration of the underlying
indices and natural oscillations of the market.
Finally, the message in all this is that you will have to consider a range of characteristic, including sector
concentration, portfolio structure/constrains, index methodology, and fees before deciding which high yield ETF is
best suited for you.
EXCHANGE TRADED FUNDS.
6
Opinion Piece (continued)
Description
ASX Code
Manager
Investment Strategy
Exposure Constraints
Metrics
Historical Yield (LTM)
Franking (LTM)
Gross Yield (LTM)
Distribution Freq
Indirect Cost Ratio
Portfolio Rebalance Quarterly Every 2 months
Number of Holdings
Top 10
Commonwealth Bank 15.3% Transurban Group 9.7%
Westpac Bank 11.1% Stockland 9.5%
ANZ Bank 9.8% Sydney Airport 9.3%
National Australia Bank 9.6% Commonwealth Bank 6.9%
BHP Billiton 9.6% Westpac Bank 5.3%
Telstra 8.3% BHP Billiton 4.8%
Wesfarmers 4.9% ANZ Bank 4.6%
CSL 4.5% National Australia Bank 4.5%
Woolworths 3.8% Telstra 3.8%
Macquarie Group 3.0% Wesfarmers 2.5%
Sector Exposure
Financials 60.5% Financials 43.2%
Materials 12.1% Materials 11.3%
Industrial 1.8% Industrial 22.8%
Consumer Staples 8.6% Consumer Staples 5.0%
Health Care 4.2% Health Care 4.5%
Telecom Serv 8.3% Telecom Serv 0.0%
Energy 4.5% Energy 3.8%
Consumer Discretionary 0.0% Consumer Discretionary 0.0%
Utilities 0.0% Utilities 0.0%
IT 0.0% IT 0.0%
Other 0.0% Other 0.0%
Georgraphic Exposure
Australia 100.0% Australia 100.0%
BetaShares BetaShares
YMAX HVST
The Fund provides exposure to a portfolio
of the ASX 20, with the added benefit of
enhanced dividend yield, downside
protection and lower total return volatility.
The Fund achieves this by writing
covered call options over up to 100% of
the Portfolio, which provides option
premiums and an additional source of
income, and a partial hedge against a
decline in the value of the Portfolio.
The Fund’s portfolio will generally consist
of large cap Australian stocks selected
from amongst 50 largest stocks, by
market cap. The fund will adopt a
‘dividend harvest’ strategy which is aimed
at maximising exposure to dividend
paying equity securities. Harvester also
has a risk-managing mechanism which
manages the volatility of the fund and
cushion downside risk by selling equity
futures contract.
n/a
n/a
Capped @ 9% per securities
n/a
34.00% 62.00%
8.78% 7.72%
Quarterly Monthly
10.10% 9.80%
20 14
0.79% 0.90%
Data as at 30/06/2015 Data as at 30/06/2015
Data as at 30/06/2015 Data as at 30/06/2015
EXCHANGE TRADED FUNDS.
7
Market Update
Exchange Traded Product (ETP) global assets under management grew 6.0% to US$2.945tn over
the last six months. Net new inflows delivered US$146.1bn, an 18.2% increase from per
corresponding period - with a strong 1Q15 before momentum slowed in 2Q15.
Much of the global equity net inflows were supported by Non-US Developed Markets, mainly
Europe and Japan, with investors taking advantage of their attractive valuations in relative to the
US. While outflows were largely driven by strong redemptions in China and from Large
Capitalisation US Equity.
Fixed Income continued its momentum from 2014 with a relatively strong period, benefiting from the
debt uncertainty surrounding Europe. However, we began to see more redemptions towards the
end as investors shift focus to holding more equity based funds. Commodities ETFs also had a
relatively soft six months buffeted by low precious metal prices.
Despite a lacklustre period in Australian equities, the Australian ETF sector had a solid six month
growth with FUM rising 21.5% to $18.3bn. This was driven by another strong period of net inflows
along with an influx of new products. Net inflows saw a healthy $2.7bn over the last six months,
consistent as per corresponding period. Unsurprisingly, the bulk of the net flows were driven by
equity related products, with international products accounting for $1.1bn and domestic equity
raking in an impressive $1.2bn. Interesting to note, we did see a slight dip in terms of net flows for
International products compared to per corresponding period while domestic equity is on track to
outperform any previous highs for the year.
Domestic equity was yet again supported by strong flows into low cost products with the three
Vanguard ETFs VAS (MSCI/ASX300), VAF (Fixed Interest) and VAP (S&P/ASX 300 Property)
accruing $404m between them over the last six months. Astonishingly State Street’s market
behemoth STW had a stunning period, amassing a whopping $411m. High Yield products RDV
(Russell High Dividend) and SYI (State Street High Dividend) and Small Cap ETFs ISO (iShares
AXS Small Ordinaries) and SSO (State Street Small Ordinaries) dominated top outflows, totalling
$57m.
Figure 1: Global ETF Assets and Global Spread of FUM
Figure 2: Australian Spread of FUM, Top 5 Inflow and Outflows (Half Year)
Source: ASX data and Bell Potter data
Top 5 Inflows Top 5 Outflows
STW $410.5m GOLD -$45.0m
VAS $192.8m ISO -$26.1m
IEU $179.4m RDV -$24.4m
VEU $145.7m IZZ -$16.2m
VTS $126.9m SPY -$16.1m
Source: Blackrock data
Domestic Equity Total (46%)
Intern. Equity Total (39.6%)
Fixed Income (4.7%)
Cash (3.9%)
Currency (2.3%)
Commodity (3.4%)
Equity
Fixed Income
Commodities
Other
(US$b) 4,000
3,000
2,000
1,000
0
EXCHANGE TRADED FUNDS.
8
Market Update (continued)
International flows saw investors playing Europe as an investment thematic. IEU (iShares Europe
350) being the only pure Europe ETF on the ASX, received $179m of net new flows over the last six
months. Vanguard’s cost effective regional international solution (VTS and VEU) also appeared to
resonate with investors, accruing $273m in aggregate. Meanwhile, iShare’s Global Healthcare ETF
(IXJ) benefited from a sector, that is poorly represented on the ASX, as it accrued an impressive
$105m.
Net inflows for fixed income ETFs highlighted a slowdown in this sector as it gather $250m, only
half the amount from the previous six months. Apart from Vanguard’s VAF (Fixed Interest) and VGB
(Government Bonds), the rest of the flows were relatively sedate across a broad number of ETFs
and providers. It appears investors were shifting their focus to more equity based funds to capitalise
on a weak stock market.
Commodities had a slightly better period with $15m in new inflows. At the expense of higher cost
ETFs, there was arguably a shift in strategy with gold ETFs as Perth Mint Gold (Synthetic Gold)
benefited from the outflows from ETF Securities’ Gold (Physical Gold). Inflows were also driven by
BetaShares’ OOO (Synthetic WTI Crude Oil), as investors take advantage of the dramatic drop in
oil prices. Currency had another good period dominated by USD which contributed $71.8m net
inflow.
There are some notable shifts in market share amongst the ETF providers over this period.
StateStreet market penetration continued to slide as it now only represents 24% of the market.
Meanwhile, Vanguard benefited from their low cost product and has seen its penetration increase
from 19% to 21%. iShares has managed to consolidate its position with market penetration steady
at 36% thanks to strong support from IVV (S&P 500) and IOO (S&P Global 100). And UBS, one of
the more recent entrants, has seen it penetration increase by a 1% with its global ethical solutions
for investors.
iShares continues to dominate with $6.6bn in FUM, compared with StateStreet on $4.4bn,
Vanguard on $3.8bn and BetaShares on $1.9bn. The remaining providers account for $1.6bn
between them. We believe the ETF providers offering international solutions are going to continue
to drive flows in the next 12-month period. This is likely supported by an influx of new international
products.
Figure 3: Spread of Fees and Market Share Amongst ETF Providers
iShares (38.1%)
StateStreet (27.3%)
BetaShares (13.8%)
Vanguard (10.4%)
ETF Securities (4.7%)
Russell (3.9%)
UBS (1%)
Market Vectors (0.7%)
Perth Mint (0.2%)
ANZ ETF (0%)
iShares (36%)
StateStreet (24.3%)
Vanguard (20.8%)
BetaShares (10.4%)
Russell (3.4%)
ETF Securities (2.6%)
Market Vectors (1%)
UBS (0.9%)
Perth Mint (0.5%)
ANZ ETF (0%)
Source: ASX, Company and Bell Potter data
EXCHANGE TRADED FUNDS.
9
ETF Summary Information
This report aims to provide a comprehensive assessment of the Australian ETP landscape
including Market Update and Summary Information to assist with the selection process. We
also enclose an individual profile sheet for each ETP that provides a snap shot including a
description, performance, country and sector allocation, risk and return metrics, and valuation
measures.
Summary Information (Page 10)
This table provides a comprehensive review of the product suite of ETFs available on the
ASX. The universe is broken into each asset class and investment style. It is designed to
allow an investor to quickly establish which ETFs are available in each category and key
points of differentiation.
This page includes:
� Description: Index, commodity or currency that the product is tracking.
� ETF ASX Code
� Price: As at 31 July 2015
� Manager: The investment manager supporting the product.
� Index: Operator of the Index
� Holdings: Approximate amount of securities in the ETF’s portfolio
� Fees : Management and Performance Fees
� Spread: Bid-Ask spread to instigate a trade
�
EXCHANGE TRADED FUNDS.
10
Summary Information
Source: Company Data, ASX, B’berg, Bell Potter
Domestic ETFs
Description ETF Price ($) Manager Index HoldingsFees
(%)
Spread
(%)
Listed
ASX
Global Mkt
Cap
Broad Market
ASX 200 IOZ 23.94 iShares MSCI ~200 0.19 0.17 Dec-10 374.1
ASX 200 STW 53.16 Statestreet S&P ~202 0.29 0.07 Aug-01 3,122.1
ASX 300 VAS 72.10 Vanguard S&P ~298 0.15 0.09 May-09 1,137.5
Large Cap
ASX 20 ILC 25.46 iShares S&P ~20 0.24 0.17 Dec-10 297.9
ASX 30 VLC 63.53 Vanguard MSCI ~31 0.20 0.16 May-11 48.6
ASX 50 SFY 55.53 StateStreet S&P ~51 0.29 0.07 Aug-01 451.3
ASX 100 ZOZI 10.26 ANZ ETFS S&P ~100 0.24 n/a Jun-15 2.1
Small Cap
ASX Small Ords ISO 3.74 iShares S&P ~201 0.55 0.68 Dec-10 31.6
ASX Small Ords SSO 11.15 StateStreet S&P ~178 0.50 0.25 Apr-11 7.8
ASX Small Companies VSO 43.34 Vanguard MSCI ~140 0.30 0.22 May-11 74.1
ASX Small Cap Div Payers MVS 15.97 Market Vectors MV ~91 0.49 n/a May-15 28.7
Sector
ASX 200 Financials x-Prop OZF 21.95 Statestreet S&P ~26 0.40 0.11 Apr-11 35.3
ASX 200 Financials x-Prop QFN 12.2 BetaShares S&P n/a 0.39 0.19 Dec-10 18.8
Australian Banks MVB 28.80 Market Vectors MV ~7 0.28 0.06 Oct-13 21.3
ASX 200 Resources QRE 4.32 BetaShares S&P n/a 0.39 0.49 Dec-10 6.6
ASX 200 Resources OZR 7.81 Statestreet S&P ~33 0.40 0.24 Apr-11 17.2
Australian Resources MVR 16.84 Market Vectors MV ~31 0.35 0.15 Oct-13 2.5
Emerging Resources MVE 6.25 Market Vectors MV ~45 0.49 0.39 Oct-13 2.5
ASX 200 Property SLF 11.95 Statestreet S&P ~18 0.40 0.15 Feb-02 586.7
ASX 300 Property VAP 75.45 Vanguard S&P ~27 0.25 0.21 Oct-10 448.9
Australian Property MVA 18.97 Market Vectors MV ~13 0.35 0.19 Oct-13 41.9
High Div
High Dividend Yield IHD 15.17 iShares S&P ~50 0.30 0.30 Dec-10 244.8
High Dividend Yield RDV 31.14 Russell Russell ~49 0.34 0.18 May-10 281.8
High Dividend Yield SYI 30.12 Statestreet MSCI ~36 0.35 0.08 Sep-10 161.3
High Dividend Yield VHY 64.15 Vanguard FTSE/ASFA ~36 0.25 0.12 Jun-11 570.0
Research Pref Aust Div Fund DIV 20.76 UBS GAM UBS ~40 0.70 0.22 Jan-14 23.5
High Shareholder Yield ZYAU 10.02 ANZ ETFS S&P ~40 0.35 n/a Jun-15 1.0
Dividend Harvester Fund HVST 23.22 BetaShares BetaShares n/a 0.90 0.16 Oct-14 114.3
ASX 20 Equity Yield Maximiser YMAX 10.73 BetaShares S&P ~20 0.79 0.20 Nov-12 369.7
Style
Australian Value Shares RVL 30.68 Russell Russell ~37 0.34 0.18 Mar-11 20.9
Australian Equal Weight MVW 22.48 Market Vectors MV ~71 0.35 0.14 Mar-14 41.6
RAFI Australia 200 QOZ 12.40 BetaShares FTSE ~200 0.40 0.23 Jul-13 63.7
IQ Research Pref Aust Share Fund ETF 21.22 UBS GAM UBS ~40 0.70 0.22 Oct-12 58.4
Alternative
Australian Equities Bear Fund BEAR 16.73 BetaShares S&P n/a 1.38 0.12 Jul-12 55.1
Australian Equities Strong Bear BBOZ 24.06 BetaShares S&P n/a 1.38 0.15 Apr-15 10.8
Geared Australian Equity GEAR 22.05 BetaShares S&P n/a 0.80 0.18 Apr-14 44.5
Ethical
Australian Equity ex Tob ex Cont Weap UBA 19.13 UBS MSCI ~70 0.17 0.12 Feb-15 84.1
EXCHANGE TRADED FUNDS.
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Summary Information
Source: Company Data, ASX, B’berg, Bell Potter
International ETFs
Description ETF Price ($) Manager Index HoldingsFees
(%)
Spread
(%)
Listed
ASX
Global Mkt
Cap
Global
World ex-Australia WXOZ 25.50 Statestreet S&P ~1346 0.42 0.21 Mar-13 157.8
World ex-Australia VGS 61.00 Vanguard MSCI ~1581 0.18 0.24 Nov-14 100.8
Global 100 IOO 105.23 iShares S&P ~100 0.40 0.14 Oct-07 2,420.3
Currency Hedged
World ex-Aus (AUD hedged) WXHG 18.98 Statestreet S&P ~1346 0.48 0.25 Jul-13 80.0
World ex-Aus (AUD hedged) VGAD 54.65 Vanguard MSCI ~1581 0.21 0.38 Nov-14 31.2
Global 100 (AUD hedged) IHOO 97.90 iShares S&P ~1 0.46 0.56 Dec-14 42.8
S&P 500 (AUD hedged) IHVV 261.11 iShares S&P ~1 0.13 0.46 Dec-14 15.7
Region
US Broad Market Index VTS 149.49 Vanguard MSCI ~3814 0.05 0.11 May-09 767.0
S&P 500 IVV 290.90 iShares S&P ~500 0.07 0.07 Oct-07 96,927.9
S&P 500 SPY 289.04 Statestreet S&P ~505 0.09 0.15 Oct-14 244,325.5
ALL-World ex US VEU 66.00 Vanguard FTSE ~2490 0.14 0.22 May-09 191.4
Europe, Australasia & Far East IVE 88.44 iShares MSCI ~916 0.34 0.25 Oct-07 83,735.0
Europe 350 IEU 61.13 iShares S&P ~352 0.60 0.18 Oct-07 3,979.6
Asia 50 IAA 64.38 iShares S&P ~50 0.50 0.30 Sep-08 540.8
Brazil, Russia, India & China IBK 46.91 iShares MSCI ~306 0.69 0.50 Sep-08 300.2
Emerging Markets IEM 50.49 iShares MSCI ~846 0.69 0.25 Oct-07 33,490.0
Emerging Markets WEMG 18.51 Statestreet S&P ~339 0.65 0.40 Nov-13 7.5
Emerging Markets VGE 58.55 Vanguard FTSE ~1022 0.48 0.53 Nov-13 44.0
Country
China Large-Cap IZZ 55.98 iShares FTSE ~52 0.73 0.33 Oct-07 9,077.2
China A-Shares CETF 67.71 Market Vectors CSI ~468 0.72 n/a Jun-15 132.0
Hong Kong IHK 30.65 iShares MSCI ~40 0.53 0.49 Nov-07 4,634.3
Japan IJP 17.68 iShares MSCI ~313 0.53 0.25 Oct-07 28.1
Singapore ISG 16.42 iShares MSCI ~28 0.53 0.43 Nov-07 1,026.3
South Korea IKO 69.88 iShares MSCI ~109 0.61 0.53 Nov-07 4,989.4
Taiwan ITW 19.99 iShares MSCI ~99 0.61 0.49 Nov-07 5,101.4
US Capitalisation
Nasdaq 100 NDQ 10.97 BetaShares Nasdaq n/a 0.48 n/a May-15 18.6
Russell 2000 IRU 167.82 iShares S&P ~1969 0.20 0.32 Nov-07 38,111.9
Midcap 400 IJH 206.09 iShares S&P ~400 0.17 0.32 Oct-07 36,797.4
Small Cap 600 IJR 159.57 iShares S&P ~601 0.17 0.40 Oct-07 23,137.7
Sector
Global Select Real Estate DJRE 21.32 Statestreet Dow Jones ~215 0.50 0.24 Nov-13 53.5
Global Consumer Staples IXI 130.11 iShares S&P ~96 0.48 0.37 Mar-09 904.3
Global Healthcare IXJ 154.67 iShares S&P ~90 0.48 0.22 Mar-09 2,374.2
Global Telecommunications IXP 86.27 iShares S&P ~30 0.48 0.58 Mar-09 638.4
Gold Miners GDX 18.53 Market Vectors NYSE ARCA ~39 0.53 n/a Jun-15 6,124.2
EXCHANGE TRADED FUNDS.
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Summary Information
Source: Company Data, ASX, B’berg, Bell Potter
International ETFs (cont.)
Description ETF Price ($) Manager Index HoldingsFees
(%)
Spread
(%)
Listed
ASX
Global Mkt
Cap
Fundamentals
World ex Australia Quality QUAL 19.27 Market Vectors MSCI ~299 0.75 0.23 Oct-14 56.7
RAFI US 1000 QUS 28.43 BetaShares FTSE n/a 0.40 0.24 Dec-14 11.4
Morningstar Wide Moat MOAT 43.04 Market Vectors Morningstar ~20 0.49 n/a Jun-15 1,187.9
Yield
Global Dividend Fund WDIV 18.63 Statestreet S&P ~102 0.50 0.31 Nov-13 69.5
S&P 500 Yield Maximiser Fund UMAX 18.29 BetaShares S&P n/a 0.79 0.22 Sep-14 38.5
S&P 500 High Yield Low Vol Fund ZYUS 10.87 ANZ ETFS S&P n/a 0.35 n/a Jun-15 2.2
Ethical
World Ex Aus ex Tobacco ex Con Weap UBW 21.62 UBS MSCI ~1550 0.35 0.29 Feb-15 2.7
Europe ex Tobacco ex Con Weap UBE 21.51 UBS MSCI ~430 0.40 0.34 Feb-15 5.4
Asia Apex 50 ex Tobacco ex Con Weap UBP 19.05 UBS MSCI ~50 0.45 n/a May-15 1.0
US ex Tobacco ex Con Weap UBU 21.55 UBS MSCI ~610 0.20 0.25 Feb-15 2.7
Japan ex Tobacco ex Con Weap UBJ 21.38 UBS MSCI ~320 0.40 0.26 Mar-15 5.3
EXCHANGE TRADED FUNDS.
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Summary Information
Source: Company Data, ASX, B’berg, Bell Potter
Fixed Income, Commodities & Currency ETFs
Description ETF Price ($) Manager Index HoldingsFees
(%)
Spread
(%)
Listed
ASX
Global Mkt
Cap
Composite Bond IAF 105.73 iShares Bloomberg ~311 0.24 0.16 Mar-12 223.4
Government Inflation ILB 114.00 iShares Bloomberg ~13 0.26 0.19 Mar-12 34.0
Treasury IGB 103.24 iShares Bloomberg ~21 0.26 0.25 Mar-12 16.2
Government Bonds RGB 21.28 Russell DBIQ ~7 0.24 0.38 Mar-12 144.5
Semi-Government Bonds RSM 20.77 Russell DBIQ ~10 0.26 0.31 Mar-12 118.9
Corporate Bonds RCB 20.42 Russell DBIQ ~10 0.28 0.33 Mar-12 86.0
Government Bonds VGB 49.01 Vanguard Bloomberg ~83 0.20 0.23 Apr-12 53.6
Fixed Interest VAF 49.80 Vanguard Bloomberg ~474 0.20 0.14 Oct-12 225.0
Government Bonds GOVT 25.80 Statestreet S&P ~51 0.22 0.20 Jul-12 5.2
Fixed Interest BOND 26.03 Statestreet S&P ~76 0.24 0.19 Jul-12 16.0
High Interest Cash AAA 50.20 BetaShares 30 Day BBSW n/a 0.18 0.02 Mar-12 706.9
Commodities
Unhedged
Physical Gold GOLD 141.71 ETF Securities Spot Gold n/a 0.40 0.12 Mar-02 406.3
Physical Gold ZGOL 14.86 ANZ ETFS Spot Gold n/a 0.40 n/a Jun-15 0.7
Spot Gold PMGOLD 14.80 Gold Corp Spot Gold n/a 0.15 0.41 Jan-11 4.4
Physical Silver ETPMAG 19.50 ETF Securities Spot Silver n/a 0.49 0.7 Jan-09 44.1
Physical Platinum ETPMPT 130.00 ETF Securities Spot Platinum n/a 0.49 0.57 Jan-09 3.4
Physical Palladium ETPMPD 80.74 ETF Securities Spot Palladium n/a 0.49 0.77 Dec-08 1.4
Basket ETPMPM 111.70 ETF Securities n/a n/a 0.44 0.82 Jan-09 4.5
Agriculture ^ ETPAGR 7.86 ETF Securities Bloomberg n/a 0.49 0.76 Jun-12 0.5
All Commodities ^ ETPCMD 13.23 ETF Securities Bloomberg n/a 0.49 0.51 Jun-12 0.1
Copper ^ ETPCOP 34.70 ETF Securities Bloomberg n/a 0.49 0.76 Jun-12 0.6
Corn ^ ETPCRN 1.81 ETF Securities Bloomberg n/a 0.49 0.70 Jun-12 0.1
Natural Gas ^ ETPGAS 0.10 ETF Securities Bloomberg n/a 0.49 2.68 Jun-12 0.1
Grains ^ ETPGRN 6.32 ETF Securities Bloomberg n/a 0.49 0.69 Jun-12 0.8
Industrialised Metals ^ ETPIND 14.52 ETF Securities Bloomberg n/a 0.49 0.73 Jun-12 0.1
Energy ^ ETPNRG 7.65 ETF Securities Bloomberg n/a 0.49 0.75 Jun-12 0.2
Brent Crude ^ ETPOIL 43.17 ETF Securities Bloomberg n/a 0.49 0.60 Jun-12 1.0
Wheat ^ ETPWHT 1.37 ETF Securities Bloomberg n/a 0.49 0.84 Jun-12 0.2
Hedged
Spot Gold (AUD hedged) QAU 11.38 BetaShares Spot Gold n/a 0.59 0.28 May-11 17.0
Crude Oil Index (Synthetic) OOO 22.36 BetaShares S&P n/a 0.69 0.2 Nov-11 26.8
Agriculture (Synthetic) QAG 7.91 BetaShares S&P n/a 0.69 0.59 Dec-11 2.7
Commodities (Synthetic) QCB 10.64 BetaShares S&P n/a 0.69 0.77 Dec-11 8.0
CurrencyUSD USD 13.42 BetaShares Spot USD n/a 0.45 0.11 Feb-11 429.9
USD ZUSD 10.45 ANZ ETFS Spot USD n/a 0.45 n/a Jun-15 1.0
EEU EEU 14.73 BetaShares Spot EURO n/a 0.45 0.16 Jul-11 3.9
POU POU 21.26 BetaShares Spot GBP n/a 0.45 0.13 Jul-11 12.8
RMB ZCNH 10.49 ANZ ETFS Spot RMB n/a 0.57 n/a Jun-15 1.0
Domestic Fixed Income
EXCHANGE TRADED FUNDS.
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Appendix A: How an ETF works
ETFs are open ended securities that trade on an exchange. Open ended denotes that new products can be created and redeemed on the Primary Market, without the requirement to release a new prospectus, ad infinitum. The open ended nature of ETFs is unique to this product class, and what keeps the underlying Net Asset Value (NAV) in line with the assets’ market price. This process is managed by the Authorised Participants and Market Makers who are engaged by the ETF operator to continually create and redeem shares to ensure the discount to NAV is managed within a defined range.
This results in a two tiered market structure: The Primary Market and the Secondary Market. The Primary Market is the market in which Market Makers, via the Authorised Participants, are able to create and redeem units. The Secondary Market is the market in which investors are able to buy and sell these units on an exchange.
Mechanics of the Primary Market
The Authorised Participant applies to the issuer to create new ETF units via creation units. In return for each creation unit, the Authorised Participant will deliver a basket of securities that has been specified by the Issuer. This basket will be transferred and held by a Custodian. Following settlement, the Authorised Participant has an inventory of ETF securities (shares) that can be accessed by the Market Makers and sold on the ASX in the Secondary Market.
The redemption process operates in a similar manner. The Authorised Participant applies to redeem the securities in creation units. In return for each creation unit, the Authorised Participant will receive a basket of securities in kind. Each ETF security effectively represents a sliver of a creation unit. Creation units are typically created in baskets in excess of $1.2m.
Mechanics of the Secondary Market
The Secondary Market is the market in which investors are able to buy and sell ETF units with the assistance of the Market Maker. The Market Maker will access the Authorised Participants (Primary Market) if additional inventory is required (create) or alternatively sold (redeem), to in effect make the market. Hence, the liquidity of the ETF is as liquid as the underlying market.
The Market Maker effectively ensures liquidity in the market place by quoting Buy and Sell prices during the trading day. These prices are continuously updated to reflect the underlying changes in the securities. The ETF Issuer generally has a formal arrangement with at least one Market Maker with a mandate to make the market within a specified range of spread. However, in dislocated markets, Market Makers can suspend operations until the market stabilises.
Figure 3 - ETF Market Structure: Primary and Secondary Market
Source: Bell Potter
EXCHANGE TRADED FUNDS.
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ETFs come in two basic forms: Physical or Synthetic. A Physical ETF (or traditional ETF) is backed by the underlying securities to achieve market performance, whereas a Synthetic ETF also incorporates derivatives to deliver market performance.
Physical ETFs can either be Full Replication or Optimisation. Full replication means that the entire index is bought in the exact same weightings as the index to replicate performance. Optimisation is similar to replication, however, the portfolio seeks to reproduce the index performance using a representative basket of securities rather than buying each and every component. Optimisation is generally used in markets where liquidity may be limited or costs are prohibitive for full replication.
Synthetic ETFs differ from Physical ETFs in that they use derivatives to track an index. More specifically, Synthetic ETFs available in Australia seek to replicate an index by purchasing a basket of securities or cash as collateral in exchange for a return contract that tracks the price and distribution performance of the relevant index, before fees and expenses.
Hence, if the portfolio underperforms the index, the amount of underperformance is payable by the financial institution to the ETF. Conversely, if the portfolio outperforms the index, the amount of outperformance is payable from the ETF to the financial institution.
However, this also raises an additional element of concern given the use of derivatives exposes the ETF holder to counterparty risk.
Firstly, the swap negotiated with the counterparty is an over the counter derivative. Hence, investors are exposed to counterparty risk for the portion of the NAV that is not represented by physical assets.
Secondly, in the event of default and the counterparty is unable to fulfil its obligation, shareholders are left with an interest in the securities held in the ETF portfolio. In the case of overseas Synthetic ETFs, these holdings may diverge significantly from the underlying index.
Finally, the Bank for International Settlements also raised some concern regarding the quality and liquidity of physical assets underlying Synthetic ETFs and in particular the motivations that may arise when the ETF issuer is a related party to the investment bank that is the swap counterparty.
To counter these concerns, ASIC and ASX have developed regulation and guidelines that state:
� Only APRA regulated deposit taking institutions (or approved overseas equivalents) are eligible to be a counterparty to an Australian swap enhanced ETF;
� Swap-enhanced ETFs are allowed a maximum counterparty exposure of 10%, and;
� A requirement for the underlying assets held by the ETF to be consistent with the investment objective of the fund.
As such, the basket of assets that make up a Synthetic ETF listed on the ASX will only be securities that either relate directly to the index being tracked or cash and must make up at least 90% of the portfolio, hence reducing counterparty risk in the event of a default.
Further, the issue of a conflict of interest with the ETF provider being the swap provider also does not currently exist in Australia as there are no synthetic ETF providers controlled by the banks to which they have a swap agreement in place. Nonetheless, we remain of the view that as the market evolves and increasingly more sophisticated products enter the market, buyers need to remain aware.
Appendix B: Physical versus Synthetic
EXCHANGE TRADED FUNDS.
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Appendix C: International Exchange Opening Hours
Australia IOZ, ILC, ISO, IHD
China IAA, IHK, IBK, IZZ, IEM
Japan IJP
Korea IKD, IEM
Singapore ISG
Taiwan ITW, IEM
Hong Kong IAA, IHK, IBK, IZZ, IEM
United Kingdom/Europe IEU, IVE, IOO, VEU
United States IVV, IJH, IJR,IXJ, IXP, IXI,
IRU, IOO, VTS
Australia IOZ, ILC, ISO, IHD
China IAA, IHK, IBK, IZZ, IEM
Japan IJP
Korea IKD, IEM
Singapore ISG
Taiwan ITW, IEM
Hong Kong/China IAA, IHK, IBK, IZZ, IEM
United Kingdom/Europe IEU, IVE, IOO, VEU
United States IVV, IJH, IJR,IXJ, IXP, IXI,
IRU, IOO, VTS
5pm
10am
10am
Source: iShares, Bell Potter
12pm 1pm11am 2pm 3pm 4pm 5pm
11am 12pm 1pm 2pm 3pm 4pm
Australian Trading Hours (EST)
Australian Trading Hours (EDST)
ETF liquidity in the secondary market is assisted by Market Makers. Market Makers effectively ensure liquidity in the market place by quoting Buy and Sell prices during the trading day. These prices are continuously updated to reflect the underlying changes in the securities.
Market Makers work most efficiently when the market is completely open. Investors therefore need to be aware of when the underlying markets open and close, to ensure the maximum number of Market Makers are on screen. It is therefore advisable to hold off buying or selling an ETF until 15 minutes after a market opens or no later than 15 minutes before a market closes.
Figure 1 - International Exchange Opening Hours
EXCHANGE TRADED FUNDS.
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Appendix D: ETF / ETC Market Making Quoting Obligations
EXCHANGE TRADED FUNDS.
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Appendix E: Glossary Active Management: Investing with the goal of outperforming a benchmark index. Alpha: The manager's return relative to the return of a benchmark. For example, consider a manager with a Russell 1000 Value benchmark. If the manager returned 7% when the Russell 1000 Value returned 6%, the alpha would be 1%. However, alpha can be both positive and negative (out-performance and underperformance). Asset Allocation: The process of spreading an investment among various asset classes such as stocks, bonds, and cash equivalents. Authorised Participant: Large investors, institutions, exchange specialists, and arbitrageurs that place orders for creation units with the fund’s distributor. Beta: In the context of this report, a beta is a representation of the tendency of a company’s share price to respond to swings in the market. A beta of 1 indicates that a company’s share price will move in line with a benchmark. A beta of greater than one indicates that a share’s price will be more volatile than the market. Bid and Ask: The price an owner offers to sell (ask) and the price a prospective buyer offers to purchase (bid). Credit Ratings: Forward-looking opinions about credit risk based on the ability and willingness of an issuer, such as a corporation or government, to meet their financial obligation in full and on time. Dividend: A distribution to preferred or common stockholders. Excess Return to Risk Ratio: This ratio, also known as the Sharpe ratio, provides a measure of the return of each portfolio relative to the risk taken by the investment manager in achieving those returns. A high return is only desirable if it does not come with too much additional risk (volatility of returns - see Standard Deviation). In the context of this report, each ETF’s excess return to risk ratio can be looked at in combination with its annualised compound total return directly below in our ‘3-year performance measures’. Grossed Up Dividend Yield: This is the dividends paid plus any franking credits passed on to shareholders. Exchange Traded Funds: Investment vehicles that are constructed like a mutual fund but trade like an individual security on a stock exchange. Created in 1989, these instruments have been widely used by institutional investors and retail investors. Franking: A tax credit used in Australia that allows domestic companies to pass through taxes that have already been paid on corporate profits. The investor receiving stock dividends will also receive a quantity of franking credits in proportion to the overall tax rate of the company per dollar in profits. Free-Float: The amount of a company's shares outstanding that are available for purchase on the open market at any point in time. Full Replication: Process in which a portfolio manager seeks to replicate performance by exactly matching the benchmark in composition and weight to ensure a similar outcome. Growth-Oriented Securities: Companies that have exhibited faster-than-average gains in earnings over several years and are expected to continue to show high levels of profit growth. Typically riskier than average stocks, they exhibit higher price/earnings ratios and often make little or no dividend payments to shareholders. Liquidity: The ability to convert a security or asset quickly into cash. Modified Duration: A measure of price sensitivity of a bond to changes in interest rates. It inversely indicates the expected change in the price of a bond assuming a 1% change in yield. Net Asset Value (NAV): The value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day. Optimisation: Process in which a portfolio manager seeks to replicate an index by using a representative basket of securities. Optimisation is generally used in markets where liquidity may be limited or costs are prohibitive for full replication. Passive Management: Investing in an attempt to track the return of the underlying benchmark index. Typically a passively managed portfolio has good diversification, low turnover (good for keeping down internal transaction costs), and lower management fees. MSCI: The MSCI indices encompass 23 developed, 25 emerging, and 22 frontier markets. Redeem: To exchange fund shares for their present value in either cash or "in-kind" securities. Running Yield: The annual coupon payment divided by the current share price. It gives an indication of expected cash flow income from invested capital.
EXCHANGE TRADED FUNDS.
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Glossary S&P 500: Widely regarded as the standard for measuring large-cap U.S. stock market performance. This index includes a representative sample of leading companies in leading industries. Sharpe ratio: This ratio provides a measure of the return of each ETF’s portfolio relative to the risk taken by the Investment Manager in achieving those returns. A high return is only desirable if it does not come with too much additional risk (volatility of returns). In the context of this report, each ETF’s excess return to risk ratio can be looked at in combination with its annualised compound total return directly. Standard Deviation: This is a measure of the dispersion of a portfolio’s returns around its average return. A data set that has many monthly returns a long way from the average return will have a greater standard deviation than a set of monthly returns that are close to the average. In the context of this report, we calculate the average monthly return of each ETF, as represented by changes in its NAV, and from this we can calculate a standard deviation from its average. A theoretical ETF that achieved the exact same return every month would have a standard deviation of zero. Spread: The gap between bid and ask prices of a security. Tactical Asset Allocation: An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors. Tracking Error: This is a measurement of how much the return on a portfolio deviates from the return on its benchmark index. A data set that has a low tracking error means that its returns are closely tracking the portfolio’s benchmark. Tracking error is the standard deviation of the differences between the return on the portfolio and the return on the benchmark. Value-Oriented Securities: Stocks of corporations that are "cheap" by traditional measurements in comparison to their price/earnings ratio, price/book ratio, and yield. Weighted Average Coupon: Used to calculate the average coupon of a basket of bonds. It is calculated as the average of the underlying bonds’ coupon rates weighted by the bonds weight in the fund. Weighted Average Term to Maturity: A measure of the maturity of a basket of bonds. It is calculated as the average of the underlying bonds’ maturities weighted by the bonds’ weight in the fund. A bond’s maturity is the length of time until the date when the principal amount of a bond is to be repaid. Yield: The return on a security or portfolio in terms of cash payments. A percentage obtained by dividing the current dollar income by the current market price of the security. Yield to Maturity: Rate of return that is anticipated on a bond if it is held until maturity. The yield takes into account both return received for the coupon payment and the return from the price appreciation or depreciation of the bonds inside the product.
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