Exchange-Trade Fund - Essay Example

Exchange-Trade Fund One may wish to understand what passive trading or active trading may mean in the stockexchange. Exchange-traded fund (ETF) is closely related to passive trading, and it refers to an investment fund that is majorly traded on the stock exchange market just like many other stocks. An Exchange-traded fund is in hold of assets such as commodities, bonds, trades, and stocks that are closer to the net value of the assets in the progress of trading day. Most ETFs track an index that includes bond index or stock index. ETFs might be attractive in a way as forms of investments, simply because of their lower costs, stock-like features, and tax efficiency. In order to understand Exchange trade fund properly, a comparison between currency of two nations namely Turkey and USA has to be carried out. The reason for the comparison is because both are developed countries and have almost similar expenditure values. The comparison will be done based on a five year period that ends in 2010. USA and Turkey are both developed countries but have different economy. The difference in economy can be reviewed through the use of Exchange-traded fund (ETF) .Additionally, various forms of ETFs which include Dow Jones Istanbul 20 (DJIST), Non-Financial Istanbul 20 (NFIST), Smaller Companies Istanbul 25 (SMIST), and Istanbul GOLD ETF (GODIST) will be considered while trying to understand ETF in the two countries. The authorized participants, comprising of large broker-dealers that have ensued various agreements with exchange-traded funds distributor, are basically engaged in buying or selling of ETF shares directly to or from the ETF. Turkey and the USA buys or sells the ETF either directly from the fund company or through the use of a broker. This can also occur in creation units, “which comprise of large segments of several ETF shares that are normally exchanged duly with baskets of underlying securities” (Wiandt and Will 37). This means that the eligible participants may opt for long-term investment in ETF shares mainly due to its high return rates and global recognition. Indeed, they play a bigger role in the open markets during the process of market making. This is mainly through the utilization of their ability towards exchanging the creation segments with their varying forms of securities. This hence provides a wide range of ETF liquidity in terms of its shares, thus assisting in ensuring that the net asset value of all the underlying assets are approximates of their intraday market pricing values. Trading can be rated in terms of net asset worth, with the traceability element of a closed-end stock, which trades all along the trading period at prices that might seem to be less or more than its general asset value. Wiandt and Will claim that, “Closed-end funds are not normally considered as ETFs, although they are certified funds and should be transacted on the exchange basis” (Wiandt and Will 39). Therefore, ETFs have been in existence in US since 1993. ETFs customarily had been in the form of index funds until 2008 when the U.S. However, “Securities and Exchange Commission authorized the establishment of actively managed exchange-traded funds” (Wiandt and Will 40). All in all, ETF combines the valuation aspect of a unit investment trust or a mutual fund. These can either be sold or bought at closing stages. The value of Turkish currency (TUR) versus the US dollar has got a little variation which can be evaluated by comparing the two currencies. For the past five years, the rate of US dollar versus the Turkish Lira has remained at an almost constant rate of 1.00 USD being equivalent to 2.23651 TRY. This little variation is mainly because the Turkish economy is currently regarded as one of the most emerging global economies. Turkey received momentum in its economy as a result of fuelling in of cheap credit into its growing construction industry by foreign investors who sort after emerging markets. Both the US and the Turkish economies seem to be growing at a higher rate. However, the US economy is at a much higher level compared to Turkish economy because there is massive action towards forward guidance, credit easing, and the simulative fiscal policies with the policy mix whereby many conservatives decry as being the ultimate lead to an inevitable higher inflation. However, high inflation is what has made US thrive well as compared to other economies such as the Turkish. As an emerging economy, Turkey has got various notable Exchange –trade funds. Some of these ETFs includes; Dow Jones Istanbul 20 (DJIST) considered as the first exchange-traded fund, Non-Financial Istanbul 20 (NFIST) which is considered as the secure sector Turkish ETF, Smaller Companies Istanbul 25 (SMIST) which is a first style Turkish ETF, Istanbul GOLD ETF (GODIST) that is traded with regard to gram indistinguishable shares, and even FTSE Istanbul Bond ETF (FBIST) that is considered as the first firm remuneration both in Turkey, and the entire Europe. The most explored exchange trade fund in Turkey is the DJIST since it allows investors to acquire proper exposure to the major and most liquid blue-chips that are listed on Borsa Istanbul. DJIST ETF can be transacted on the Istanbul Bond Exchange (BIST) just like other stocks and can even be sold and bought through any brokerage house or licensed bank. DJIST shares are easily obtained through the BIST. This has mainly been because there are well-set protocols that are meant to ease the transaction. Protocols, as referred, include implementation of Takas-bank system, which is a form of Economic Traded Fund. It bases its ideology on a liquid index that can ease favorable realizations even if there exist infrequent trades of the ETF. Also, institutional investors using only a single transaction, gain exposure to the Turkish Capital Markets. The other factor is that, it is considered as the first and leading Turkish Exchange-traded Fund. DJIST also offers the institutional investors with the sole ability of acquiring exposure to the entire Capital Markets of Turkey just with a single transaction. On this note, DJIST has got 20 largest liquid stocks all in the BIST. All in all, DJIST shares are easily obtained through the BIST. Conversely, DJIST offers diversification since it comprises of the prevalent and most liquid Turkish blue-chips that are easy to trade with. Dow Jones Istanbul 20 ETF hence plays a role in minimizing the risks and uncertainties that are imposed by single stocks. It makes company risks as well as liquidity to be more manageable because it can be used in diversification of the entire form of portfolio and/or comprehensive investment policy as a major holding.   DJIST allow investors to venture in twenty stocks once and for all instead of just investing in a single stock thereby reducing more risks and uncertainties, hence initiating higher stock market returns in. Additionally, this Turkish exchange traded fund uphold transparency to a greater extent because, it is a trading trend is subject to publication on its extensive website every trading day, hence enabling investors efficiently keep track of their daily investments (Lerman 54). The trading portfolio or trend has to do with the market exchange of TUR against other global currencies, including the Dollar. Finally, the aspect of continuous pricing of its shares on the BIST has led to the success of DJIST. Intraday NAV also are issued by the manager almost every 15 seconds of BIST trading hours. This hence allows investor to amass intra-day liquidity. Therefore, efficient and effective intra-day pricing ensures reduced deviation from the fund’s Net Asset Value. Compared to other global economies of the developing or emerging economies, “the Turkish economy seem to be booming in relation to the exchange value with some of the leading currencies, for instance, the US dollar” (Lofton 46). Consequently, for the past five years or so, the Turkish Lira has tried to maintain its constant rate against the US dollar ranging between 1.978 and around 2.456. This owes to the acceleration of the industrial output of Turkey, assisted by strong growth in the export sector, as well as the booming construction industry witnessed within the stated years. From the analysis, this has been mainly boosted by its emerging trends in terms of the virility of its exchange-traded funds (ETFs) in the stock and money market. Being the most efficient and effective investment funds that can hold assets such as bonds, commodities, or stocks, and being traded on stock exchanges; exchange-traded fund (ETF) has been very attractive to investments simply because of their tax efficiency, and low costs that has currently made them more popular and lucrative in nature. In conclusion, as evident, ETFs track an index that includes bond index or stock index. ETFs might be attractive in a way as forms of investments, simply because of their lower costs, stock-like features, and tax efficiency. However, ETF varies from country to country evident through the comparison of currency of two nations; Turkey and USA. Touching on the Turkish Lira against the US currency, the main factors, which had to be considered in terms of such valuation, had to do with this aspect of exchange-traded funds simply because they are the main determinants of the country’s currency value, and the global recognition. Though, regardless of the efforts that are being exerted by Turkey, the US currency has still maintained its value since they have also got well-established stock and money market systems. Work Cited Lerman, David. Exchange Traded Funds and E-Mini Stock Index Futures. New York: John Wiley & Sons, 2001. Print. Lofton, Todd. Getting Started in Exchange Traded Funds (efts). Hoboken, N.J: Wiley, 2007. Print. Wiandt Jim. Investment and Securities. New York; Chichester: Wiley, 2001. Wiandt, Jim, and Will McClatchy. Exchange Traded Funds. New York: Wiley, 2001. Read More