9 – L2 08 Authorized Participant And The Create Process V4

Now, here’s where ETFs start to look different from mutual funds. Recall that with mutual funds, investors give their cash to a mutual fund and the mutual fund then invest that cash in a portfolio of stocks. With ETFs, the ETF sponsor only makes transactions with special partners called authorized participants or APs for short. … Read more

8 – L2 07 ETF Sponsor V2

Financial institutions that issue ETFs are called ETF sponsors. ETF sponsors could be banks or institutional investment firms. The largest ETF sponsor is BlackRock’s iShares. iShares was created by Barclays’ Global Investors, which in turn was acquired by BlackRock. As of early 2018, iShares had more than $1.75 trillion of assets under management, which made … Read more

7 – L2 06 Hedging V3

Now, let’s discuss how investors can use ETFs for hedging. Recall that hedging generally means entering into a transaction in order to reduce exposure to price fluctuations. Let’s see how hedging works with ETFs. If you have a portfolio that holds many stocks in the S&P 500, you can take some short positions in an … Read more

6 – L2 05 International ETFs V2

Investing internationally is easier with ETFs. Normally, if you wanted to trade stocks in another country, you might set up a brokerage account with a firm in that country. Also, you would be trading when markets are open in that country’s Stock Exchange, which is tough if the time zones are different from yours. For … Read more

5 – L2 04 Commodity ETFs V2

If you don’t cancel or roll over your futures contract by the due date, you’re obligated to buy the asset. Whether it’s a barrel of oil or a flock of sheep. So, imagine that you have bought multiple gold futures contracts, that have different due dates. You’ll have to set up a lot of reminders … Read more

4 – L2 03 Commodity Futures V3

For most investors, it’s easier to buy Futures contracts that are tied to commodities. Buying a futures contract is an agreement between two parties to buy or sell an asset at a future date and at a fixed price. If you trade futures directly, remember to mark your calendar, because you’ll need to either close … Read more

3 – L2 02 Commodities V2

There are some common ways that investors use ETFs, and these include investments in commodities or international stocks, and also using ETFs for hedging. Investing in commodities is easier with ETFs. Commodities are raw materials that are interchangeable and tradable. By this, I mean that a commodity such as a barrel of oil can be … Read more

2 – L2 12 Shortcomings Of Mutual Funds V2

Recall that there are some shortcomings in Open-End and Closed-End Mutual funds. Open-End Mutual Funds may need to maintain parts of their assets under management in cash to let investors withdraw on any given day. This dilutes the funds overall performance. Also, Open-End Mutual Funds may limit the number of times that you can invest … Read more

17 – MV 11 Guided Meditation V1

We’re going to take a minute to let our brains chill out. Learning requires active engagement of your brain and really your whole self, and research shows that giving yourself adequate time to rest and recuperate helps your new knowledge put down roots, so you can use it effectively in the future. Getting enough sleep, … Read more

16 – L2 14 Summary V1

Let’s take a step back and see what we’ve learned. We’ve learned that ETFs charge smaller fees than mutual funds or hedge funds. Moreover, ETFs are more efficiently priced than closed-end funds because authorized participants use arbitrage to bring the ETF share prices in line with the underlying stocks. We hope you have gained a … Read more

15 – L2 13 Realigning ETF Share Prices V2

Going back to the example with the UCITS ETF, the demand for the ETF has led to a premium on the ETF shares. An AP such as Morgan Stanley may see this price difference as an arbitrage opportunity. So, the AP triggers the create process, that is Morgan Stanley may buy shares in Inditex, H&M, … Read more

14 – L2 12 Misaligned ETF Pricing V3

Let’s see how an AP might seek out arbitrage opportunities with ETFs, and how that results in stable pricing of ETF shares. We’ll look at the iShares STOXX Europe 600 Retail ETF, which tracks eurozone retail companies. These include companies such as Inditex, which sells the Zara clothing line and is based in Spain. It … Read more

13 – L2 11 2 Arbitrage Farmers Market V1

Hi, there. Do you remember Betty from module one? She used to sell fruit at the local farmers market. Hi, Betty. What are you up to these days? Hi, Eddy. Well, I’ve been working as an investment analyst at a new hedge fund Roulant and partners. Well, that’s cool. What brings you to the farmers … Read more

11 – L2 10 Lower Operational Costs And Taxes V2

Recall earlier that we mentioned how ETF sponsors are more tax efficient and that their transactions are not taxed as much compared to traditional mutual funds. One reason is that ETF sponsors do not deal directly in cash. During ETF share creation, an ETF sponsor creates shares and receives a bundle of stocks of equal … Read more

10 – L2 09 Redeeming Shares V3

If investors hold ETF shares and want their money back, they just sell their shares on the stock exchange. There’s no need for them to interact with ETF sponsor. For reasons we’ll see soon, an AP may decide to redeem ETF shares for the original portfolio of stocks. This is essentially reversing the original ETF … Read more

1 – L2 01 Intro V2

In this lesson, we’ll introduce Exchange Traded Funds or ETFs, and get an understanding of how ETFs work. ETFs are considered a significant innovation in finance. One might say that ETFs did for the financial services industry, what smartphones did for the tech industry. As the introduction of ETFs led to evermore products that customers … Read more