What are Exchange Traded Funds (ETFs)?
They are open-ended funds that, like stocks:

• Are traded on the stock exchange
• Are bought and sold through brokers
• Enjoy the same settlement process.

The underlying portfolios are transparent and easily available, and there is a real-time intra-day indicative NAV.

What are the advantages of Exchange Traded Funds?

Efficiency

• Diversity of a market in a single stock
• Invest at a lower cost
• Gain market exposure quickly
• Gain access to markets that are not easily available

Transparency

• Daily information about underlying stocks
• Real-time intraday pricing

Flexibility

• Traded like a share
• Asset allocation, cash equitization, hedging, etc

Liquidity

• Market makers provide liquidity for investors to enter or exit quickly

How does ETFs compare with Stocks and Unit Trusts?

	ETFS	Stocks	Unit Trusts
Diversification
Sales charge	Brokerage fees apply	Brokerage fees apply	3 - 5%
Management fees	Less than 1%		1 - 2% p.a.
Intra-day pricing & trading
Trading Flexibility
Liquidity	Intra-day	Intra-day	Eng-of-day
Cash settlement	T+3	T+3	Upfront

Who are the parties involved in the ETF Market?
Stock Exchange – Platform for listing & trading

Market Maker
Provides continuous bid/ask quotes to ensure availability of prices and liquidity

Fund Manager
Responsible for the tracking of the Fund’s benchmark index

Participating Dealer
Creates and Redeems ETF units with the Fund Manager

Investor/ trader
Buys or sells ETF units on Stock Exchange or with Participating Dealer

What happens in the Primary Market?
The Primary Market is for trading large units of the ETFs. There are 2 scenarios: cash dealing and in-kind dealing.

• Cash Dealing

Eg: Investor approaches Participating Dealer with S$5m and wishes to purchase units of ETF

Participating Dealer approaches Fund Manager to create ETF units

Fund Manager buys S$5m of stocks and creates X units of ETF

Participating Dealer transfers X units of ETF to Investor

• In-kind Dealing

Eg: Investor approaches Participating Dealer with a basket of stocks as determined by Fund Manager

Participating Dealer approaches Fund Manager to create ETF units

Fund Manager feeds the basket of stocks into the Fund and creates X units of ETF

Participating Dealer transfers X units of ETF to investor

What happens in the Secondary Market?
The Secondary Market is for trading the ETF on the stock exchange.

• ETFs are traded on stock exchanges just like normal stocks
• To trade in the ETF, one can approach his/her stock broker (eg. DBS Vickers or Vickers-Online)
• Pricing is provided on an intra-day on a real-time basis, unlike unit trusts which provide pricing once a day
• Like stocks in the exchange, Prices are determined by demand and supply
• Market maker’s role is to provide quotes on the ETF continuously
• Price per unit typically resembles, but is independent of, the underlying NAV per unit of the Fund.