Hi everybody russell jude here. I hope you're all well. And today's session we'll be doing exchange traded funds, mechanics and occupations for those that are familiar with the cf a syllabus. Um You'll notice this is a C. F. Failure to topic. Um the current topics that's reading if memory serves I think it's reading 43. A new introduction to the cf valuable to syllabus. Well when I say new um it's about you're too old um and forms part of the portfolio management uh section. Okay. On that note guys, I know everybody is given of their hard earned time. So I think let's jump in straight away. Okay. As opposed to some of the other topics that perhaps we've seen together um E. T. F. C. Exchange played advice is not the most difficult one. A fairly gentle topic. A lovely topic. Okay. Um I would have thought that perhaps um our presidents when I still about our president had brought about the president of the Cf a society, South Africa and marina marina fisa um is very involved in E. T. S. Via company that she's involved with. So I thought maybe she would come and help us today but uh you're stuck with me. So um let's get ourselves going straight away guys. Okay, I'll run through the presentation and should take us just over an hour is the slightly shorter presentation of course guys. As you know, we are guided completely by by you guys. We reach out to you and just find out what topics you you would like us to to handle. So for the coming topics please, if there's anything else you would like to reach out of course and we'll handle those topics for you. Um Let's start Australian guys. Time is of the essence E. T. F. C. Exchange traded funds, mechanics and applications. Um And let's make sure that by the time we finish up today that we are able to get an understanding of how these work. Okay? In terms of the what we're going to cover, we're gonna cover the definitions if you look over here on our page. Okay? We'll be covering the definitions of E. T. S. What is Anita the key behind E. T. S. Of course guys is the creation and redemption process, how that works. Okay. Um, how they trade in both of their markets, both the primary market and the secondary market. Can we're gonna go in remember of course E. T. S. Forms part of the portfolio management section. So we'll be looking at things like tracking error. Okay, portfolio management, passive funds, that kind of thing. Well, look at bid ask spreads. Okay. Sources of premiums and discounts to the near to the nearest value. We'll talk about that and we'll conclude with some costs, risks and uses of E. T. S within a cost radio context. Okay? Um as I'm sure you guys are aware, we do have a bit of a chat that's open and that you're more than welcome to ask questions via that and we'll do our absolute best to answer that for you. Okay guys, I'm gonna jump straight into the presentation as I say, please feel free at any point to ask any questions if you would like. Okay, over our page over here. Okay, I'm gonna read to it. I'm gonna read you this definition of verbatim and then I'm gonna go a little bit off track, a little bit and I want to just, we'll do a little bit of artwork today, we'll draw a few pictures just to make sure that we fully understand exactly what it is. Okay. The verbatim definition is an exchange traded fund. Okay. And whenever you look at the terminology of anything, okay, we can see over here, it's got two very key words to it. Okay. The first word is exchange traded. Okay. Um in other words, it's traded on an exchange. Okay. Which is lovely. And and and should excite most people that are seeking liquidity because obviously that will provide a fair measure of liquidity. Generally speaking, when one operates on an exchange versus um off market, over the counter market type transactions. Okay. And it's a fund. Yeah. Now remember the beauty about any tear. Okay, attracts an essence. Okay. And the beauty about that is it can take any asset that you like. It's become such a fantastic, fantastically um a product that's out there that is so popular that there's very little that you can't. In fact, we'll have to let you speak to the experts of course. But there's most things that you can get most assets, most indices, most sectors, most commodities that you can in fact get involved in via the purchase of an ET. Because remember and this is the whole key behind E. T. F. E. T. A. Business security. Okay. That tracks and answered what I said, are we talking about that as it can be an index a very famous. Okay. Uh Index E. T. F. Is of course the S. And P. 500. Okay. It can track a sector, banking sector, industrial sector, anything like that very common to track commodities, gold, silver platter or anything like that or any other asset. And well, as we go through the mechanics of how the E. T. F. Process works, we'll see very quickly why it's such a popular product and it's so easy, easily able to, um, to take any asset that you, that you so wish. Okay. The beauty ability of skies, it's purchased assault on an exchange just like a regular stock. So it's very easy to create the trade ability of these and the transparency that comes along with it is fantastic. Okay. Uh, and an idiot can be structured to track anything from the price of an individual commodity. You can get a basket of commodities. You can get one stock, you can get many stocks, a basket of stocks, anything like that. Okay. We'll talk about that a little bit more as we go through that. Okay. The price of media shares changes to go after that, which is fantastic as opposed to, and we'll talk a little bit about this because I'm sure played on a lot of people's minds is how does this then differ from a mutual fund? Can we'll talk about that as we go through. Okay. But the beauty about E. T. F. Is that it's bought and sold on an exchange. The pricing of it is very transparent. Okay. So you can get to see the price at any point in time throughout the day. Okay. Some types of VTS, there's Bondi TFC. Okay. Their track bonds. Remember when we talk about it, if I said to Bondi TF, all I'm saying to you is that it's in strange traders fund with the underlying asset them being a bond. Okay. Industry 80 F. That contract specific index indices like technology, banking, anything of that nature commodity TFC gain the underlying instrument behind the E. T. F. There will be a commodity, whatever that commodity happens to be currency. T. F. The same story that underlying uh asset for that E. T. F. Will be a currency whatever that currency happens to be as well. And then you get inverse cts. Okay. An inverse CTF? It's an interesting one. Okay if we get a bit of time we can talk about why someone would want to be involved in an inverse CTF. But university works the other way around. Okay. Generally something like a little bit of a short position. So for example when stocks go down the CTF will rise in value. It's an inverse. Okay? Let us jump over the page over here guys. Okay. And we're just gonna I'm gonna read this particular um slide to you and then I'm gonna we're gonna start to draw a few pictures. Okay. The key person behind the E. T. S. Okay. Is the what we call an ap an authorized participant that's that's going to be. You may have heard the ap or the authorized participant often being referred to as a market maker. We'll see why it is often good to have your ap being a bit of a market maker. Being being being a person. That's got a little bit of pool on the secondary markets in which they trade. Okay. Catch They are involved very much with the E. T. F. Issuer or santa's called E. T. F. Sponsor. Okay. And they are heavily involved in the process called creation and redemption. Okay. What we're gonna do then is once that E. T. F. Has been created. Okay. It will then trade on the secondary market. Okay. To the extent that that made sense to you, great. If it hasn't, we are going to start to uh let's start some illustrations over here. I'm gonna go into a brand new page over here guys. And let's talk about the first process that we speak about guys. And that will be what I call the creation process. Okay, let's go. So you've got what we call the creation process, what we have uh in the middle of the creation process. And I'm gonna break the process down into two stages. Okay? Stage # one. Yeah. We'll be looking at the primary market. Okay. Once we've done the primary market, we can move across then to the secondary market. Let's start with the primary market over here. Okay. Now, In terms of the primary market, look what you have overhand. And I'm gonna be working in terms of my example just to try and give an illustration of this a little bit easier is let's work with the s. p. 500. Okay, let's work. Let's work with that as being and we have to save here. What am I creating? Well I'm creating a in exchange traded fund and eat here for what what's my underlying asset? Yeah. The S. & P. five. Okay. Now when I look now at the primary market, let's have a look what happens over here again. Let's put our put him over here cat. Yeah. He will be our ap that is our authorised person, sits in the middle. That's put him over there. Very central to exchange traded funds. Very central of course to the E. T. F. Process. Okay. What what what the authorised person does? Okay in terms of the process we call him the A. P. What does he do? The authorised person? He will then go okay. And he will remember because it's an E. T. F. That's backing what's the underlying asset? The S. And P. 500. He's going to go to the market over here as the market cat the stock market And what does he purchased? He bars every single stock in the s. p. 500. If it was a gold E. T. F. He would buy gold if it was platinum etcetera etcetera. Okay so but in this particular case we made a little bit easier to try and understand He's purchasing the s. p. 500. So he goes into the market and he bars all the stocks. Okay all the stocks that represents the S. and p. 500. Okay now if you have a look at the transaction will take it slowly over here guys the Ap now owns all of these shares In the s. p. 500. Will there be owns for this particular transaction he buys? Let's say for example one share of everyone in the S. And P. 500 in its correct weightings for this particular index. What does he have now here it's gonna look what he's got. He sits now. Okay please excuse the arctic. It's obviously not why you're here. You're here for the hopefully the the financial knowledge uh not for the arctic. He now sits once guys once he has purchased all of those shares on the stock market, he's now got what we call a basket, everyone comfortable that he's now got a basket of stocks. Here's his basket owned by the ap the ap then takes his basket. Okay just takes his basket with him and he gives that basket to. Now this is the first time that we've seen it. Okay here is the E. T. F. Sponsor. Here is the person that is sponsoring the E. T. F. Okay we'll call him the chief sponsor. Okay hand over the basket of stocks to the E. T. F. Sponsor? The E. T. F. Sponsor then. What does he give to the ap? Okay. He gives him what we call, Put them over here. The fan, she is she is in the fund. Okay. That's the creation process. If we had to stop over here guys. Okay. Two observations. I just want to point out observation number one. What is the ap own at the end of the creation process? He owns shares in the E. T. F. That's all. He's got shares in the T. F. Yeah, remember what's interesting about the transaction guys between the Ap and the sponsor. Okay. Remember within the creation processes, three parties. There's the market, the ap authorised person and the sponsor. The E. T. F. Sponsor. What do you notice between the relationship between the ap and the sponsor? What we see over there guys? Okay. No money changed hands. Okay. No money changed hands. It's kind of like a payment encounter, what we call it in payment transfer. Okay. When in kind transfer. But as you see over here guys, what happened the basket of S. & p. 500 stock went to the sponsor and the sponsor gave the ap shares in the fund. Okay. That is the creator. We're still in the creation process guys, That's the primary market. Okay. I'm gonna move down a little bit over here. Okay. What do we see now in terms of our process, how do we move now? I'm gonna move across from the primary market guys to the secondary market. Okay. And as we move into the secondary market, what happens? Remember again the ape he's holding shares. Okay. Now what is the ap do with his shares that he now holds? Okay. He enters into the secondary market in the secondary market. If I could just give you a nice words but what could you tell me that? Has the exchange. This is where they trade the trade on the exchange. Okay. Now in terms of this process what we see the ap will take his fund shares and sell them. Okay put them onto the market. Who's gonna now within this market? What do you have? Okay you've got buyers and sell us. Okay. So what happened over here as part of the initial transaction? Okay. The ap then the picture is looking a little bit busy now but let's take it across there and the ape took his frenchies and he sold them on the market. Remember it's a secondary markets in exchange there's buyers the buyers by the fund shift from the ap. Remember the ap is a little bit about what we call it, a bit of a market maker get the buyers have got the shares now and now because it's the secondary market because it's an exchange. What happens? Well my eyes and sailors transact all day every day and remember we said a little bit earlier on in terms of this particular transaction. Okay. In terms of this transaction, what do we see? Okay. Trade throughout the day a lot of transparency. A lot of liquidity will depend on the on the particular underlying but with an s. and p. 501 can be guaranteed in a sense of quite a lot of liquidity that's going to be going on. Okay if we have to start over here, this is the market, this is the primary market. If this is the secondary market for the creation, what have we done that? Just a quick revision over here. Got submission. But on the same page, in order to create these particular transactions, the ap bars, the underlying whatever happens to be. In our case, it's the market. He then once he's brought them here in a sense, put them into a basket. Okay, We we call this the creation basket, the basket then gets handed over to the E. T. F. Sponsor. We see that process happening here, guys across to the E. T. F. Sponsor and the T. F. Sponsor in exchange for receiving the the basket. The creation basket will give Shay's frenchies to the ap the ap takes his fund shares. Now this is the end of the primary market when the security has been. Uh and and and the particular shares have been created. He then takes these. Okay? And then gives them over across to the market. Okay? He takes the fun shares. Now we operate in the secondary market and buyers and sellers exchanged. Buy and sell shares all day. All day long. Okay. And remember, okay again, now that we're trading in the secondary market, what drives the secondary market supply and demand market forces? Whatever happens to be will drive the pricing on this particular market. But remember and this is so important to remember guys, what are the buyers and sellers on the secondary exchange dealing in? Well, they essentially dealing in the index. That index, OK. Has a value. Okay. And that's so important to remember that end of the day. Okay. If you ever wanted to know what the real value of what these buyers and centers are exchanging, well, you would say, okay, what's in there? All the shares in the S&P. Now we use a fancy with what is that? What's that worth that's worth the navy, the net asset value. Mm. And it's so important to remember if we stop it at this point in time that we've got to values. Okay. Value # one. Okay. There you, number one is what the buyers and sellers are prepared to buy the E. T. F. From each other at buying and selling it is what it is. Okay. But underlying that there's a value and what is that underlying value? That underlying value. Okay. Has got a value. What's that value? What we call the Navy? Okay. Now the beauty behind the uh E. T. F. In exchange traded fund, is that the price that the buyers and sellers are exchanging from each other at Okay. We'll never be too far away from the underlying N. A. V. And why not? Famous word we use are going to see it again and again, guys arbitration because remember that E. T. F. Itself is an S. And P. 500 E. T. F. Which means that it is, It's got the value of the s. p. 500 index. How do we know what that value is? Well, it's easy. Everyone knows what the value of the S. And P 500 is. Click on any any website, any market. Uh you'll be able to get it in five seconds if the process are between the buyers and sellers or uh variant from what the N. I. V. Is the net asset value of the underlying asset. There'll be some arbitrage. We'll talk about that in a sec. Okay? We move on little bit over here. Okay, Let us jump in. Okay? And let's move to the next process. We've we've dealt with the creation process. Let's go and have a look over here. Okay um at the what we call the redemption process? That was the creation. This is the redemption. Okay. What happens with the redemption? Okay. Again take us down there a little bit further. Okay you've got the same person involved again. Here he is. Okay. Here is your ap that theory is your authorized person look what he does. Okay so let's say for example he wants to redeem fund shares, how would you redeem them? Well remember the only way he can get them. But how does he get back the fund shares? Well let's put a new player over here on the secondary market. Okay. And here is a sealer where? Mhm. On the secondary market. Okay. The stellar on the secondary market. Okay. We'll sell the shares through to the I. P. Okay. And again it's important as we go through each process. What does the ap now hold? Okay The ap now holds fan sheet. Okay what he wants to do with these fun shares? He now wants to take these fund shares and he wants to redeem them. Mhm. Excuse me. Okay the ap wants to redeem the fund. How would you go about doing this? Okay. He takes his fan. She's okay. Where did he get them from initially? Remember if I take you back up here let's go back up here. Remember the TF sponsor? Just put him over here? What here is the E. T. F. Sponsor? What happens now? The ap takes his fun shares can and he gives them back to the T. F. Sponsor. There are the fund shares going across. We are talking about fund shares. We talked about the shares of the T. F. Okay what happens then? The E. T. F. Now has got their fund shares back. What do they give back to the A. P. Yeah. Okay. Remember his basket? Remember the basket that that he gave to them? They'll give that back to him now. Yes he's basket. Okay. What's in the basket? Okay. S. and p. 500 shares. Okay. What does he do with the basket? Because the basket in and of itself is not much used to him. He'll take his basket. Okay and take it to wear to the market. Okay. And he'll still all the shares in the basket. In other words redeem them all. Okay and that that is the end of the process. Okay that's the again let's go through the redemption process. The redemption processes, the fund shares essentially go away. How do they go away? Well the A. P. Is the authorised person, He bars them from the secondary market. Obviously there must be a seller on that market. He doesn't want those. Doesn't want the E. T. F. Anymore, sells sells the fund shares to the ap. Okay um The ap takes the fund share sells them okay Doesn't sell them but he gives them back to the sponsor. E. T. F. Sponsor over there. The E. T. S. Sponsor said well here's a basket then you gave me those, here's your basket back. What's in the basket? Get all the shares in the S. And P. 500. Okay the A. P. D. Okay well thank you very much for that. Takes those shares The 500 shares that represent the the s. p. 500 index and he sells them to the market. Okay And that's the process in very short very simplified process over there. Okay Just I'm gonna carry on off slide for a moment and then we're gonna hop back into the slides and hopefully by the time when we hop back into the slides, um everything will move quite quickly, quite smoothly, we hope. Okay, guys, carrying on over here now, remember what we spoke about a little bit earlier, we spoke about the N. A. V. Now, remember there's always two values to uh and E. T. F. Okay. Very number one. Okay. Or what we call? Okay, the fan, she's now the fan, she is these these are the T. F. Shares, calling me TF shares? Or the french is where there are these trade, Will these trade on the remember these trade on the exchange on the marketing? Okay. In addition to the french shares, you've always got what underlies the Funches. Okay, and what underlies the fun she is? Uh let's just assume we're gonna say there's 500 shares in the S. And P. 500 index for example. Okay. 500 shares. Okay. These 500 shares each have a value as you and you can spot them on. The market is not difficult to tell they've got a market value. This now is equal to what we call the net asset value then of the E. T. F. Okay, How is this determined the navy or that I would take, let's say I take the 500 shares. The trade on the stock market times them by their market price and I'll get to a proper real value and we call that the navy the net asset value. Okay. The T. F. Shares, the T. F. Shares are the bundled S. And P. 500 package basket that has been sold into the secondary market by the the pipe. Okay. Um And they trade between buyers and sellers. There may be a little, essentially speaking, these two should be equal to each other. No reason why not because the fund shares, what underlies the fund shares? Okay, or the TTF? The S&P 500 shares? They should be the same value as we go through. Okay. Now, as long as you've got that concept, right guys, we're going to carry on just a little bit over here. Okay. There we go. Now when we carry over here guys, we work with within two scenarios, let's talk about scenario number one. Okay. Scenario # one. Okay. And let's put that over here, call that scenario one. Okay. Is when the sum of all the shares or the net asset value? Okay. Is greater. Okay. Is everyone happy with that? Sorry, let me just, okay. Sorry, I'm gonna I'm gonna switch that around if you don't mind. Okay, so the some of the shares, okay, all of these shares over here, the net asset value is less. Okay. In other words, the fund shares, how they trade on the market is more than the navy. It's give an example. Just uh let's say for example that the fund shares over here, The fund shares. And I remember the fund shares or how they trade on the secondary market. It take an example that's equal to 105. Okay. And the net asset value of all the shares that underlying are worth a 100 shouldn't be it shouldn't be they should be equal. But let's say for example the fund shares as they trade on the stock market okay. Between buyers and sellers. The secondary exchange. Somehow there's been a lot of excitement involved. The fund shares start to trade upwards. They traded 105 But what's underlying those fund shares? The net asset value. It's only worth 100. There's a problem here. Okay, now we enter the concept which we call arbitrage, how will this particular scenario affects itself up? Okay, let's have a look. Okay and what's going to happen over here? Okay, so the A. P. Says whoa these funds shares are worth more than the underlying, what would he do? Let's go, let's go through the process. So the ap then we'll go and do what he will go through which process you go through the creation process. What does he do? Okay, what does he do for the creation process? Let's just work it out. Okay. He will go and he will buy it. Just write this down, he'll bother underlying shares, everyone happy with that. In other words, he will go and get himself what he'll create, he'll make himself a basket. Remember the basket? He'll make himself a creation basket. What does it cost him to make the creation basket? Okay well it costs him $100. That's the underlying N. I. V. Okay so he buys all the underlying shares and he put them in a basket. He gives them across to the okay to the T. F. Sponsor. What does the sponsor give him in exchange the sponsor gives him fan, she's remember that? No money changed hands for that. What does he then do when he's got the shares? Well he sells them in the secondary market. What does he sell them for? Well they're currently trading at a higher price. The fund shares are sitting at one of five. He makes a profit of five. Does that make sense? Okay so to the extent guys that the fund shares okay are trading at a higher price than the underlying in a v what will he do? Creation? And cause this takes suspect by the way, those guys that have been involved in the presentations, We've had quite a few already. Well remember that this is simple. Arbitrage. Arbitrage never changes house arbitrage work. Arbitrage works. You always Buy the cheaper asset. That's why we're here guys, you can see we are buying the underlying, that the cheap asset at $100 and we sell the more expensive asset, which is the fund shares in one of five with a $5 profit. Okay, how that makes sense guys, if I look at the chat over here, I'm just checking, we have no, no questions just yet. Either it's very easy or very clear. We hope that we hope a bit of both. Yeah, Let's look at scenario number two. Scenario # two is that when the underlying net asset value shares are worth more than the fund shares and again shouldn't happen. But assuming that that did happen at the underlying and these shares are worth more than the fund shares, let us go and have a look at what happens now. Okay. So in this particular case let's go again here. The fans sh is Trading at this make them 95 okay. In the nearest value, the underlying or trading and 100. Okay. In other words, the the value that underlying value is worth more than the french is. Now we go through the other side of the process. Okay? And we will go through redemption process and let's see how this works. Okay, So what's going to happen over here? Okay. The ap will then go into the market. Okay. And he will buy okay frenchies. Who from from the secondary market? Who from a seller on that market? What does he pay for those? Well, he pays 95, doesn't he? That's what they're trading at. Okay. What will he then do? Okay. He now owns fund shares. Okay. He'll take those frenchies. Okay. And he will keep it consistent over here. Keep our colors. Okay. He will take the fund shares and give them back to the fund. Okay? Give them back to the fund sponsor? Change of money. Know what happened when he gives fund shares back to the to the fund? What will they give him back? They'll give him a basket. Remember? He gives them shares or they give him shares? And what's exchanges? The basket? No cash. So he'll give the fund shares back to the fun sponsor. What will he get? Okay, He'll get french. Is what does he do with the frenchies? He sells the shares now he's got a basket, he sells the basket. What was the basket worth? The boycott is worth a 100 because remember that is the net asset value? Okay. Of the underlying And again a profit of five. Okay. So you can see arbitrage will quite quickly in an efficient market like that of the E. T. F. Arbitrage will quite quickly. Okay uh iron out any pricing differences but also it's a very transparent market as well. Okay, so this is what we've illustrated over here guys, whenever the key to remembering and understanding this guys is that there's always gonna be two price is involved with the T. F. Is the price of the shares traded on the secondary market. Where buyers and sellers on the exchange and then there's something that underlies that value. Okay. Which we call the net asset value. That's quite a value to any time that the particular process moves apart from each other guys. Okay, then you're going to experience arbitrage will kick in either creation for redemption. Okay. I hope that's clear to everybody. That is the end of the pictures. Okay. I hope I see there's no questions coming through on the particular presentation chat, which is a very good song, a very bad sign. And we're taking a very good sign that it's clear to everybody what has gone on and we were all in understanding and together on the same page. Okay. Having said that guys, I now want to move straight back to the actual presentation. Okay. But essentially we've really covered everything we need to come, we'll go and cover a little bit more detail and specifics as we go, okay? And do the entire presentation, but that is the basis behind the presentation, that's the detail understanding. Okay so you've had all the pictures we've had creation, remember coming out of the pictures, creation, redemption and arbitrage. Those are your concepts that we've dealt with so far. Okay, now let's go do some reading. Okay, we're back on the slides over here guys if you are following. Okay. Um this is slide number I think a slide number four images, make sure we have we're keeping uh on track with all of these guys. Yes. Okay slide number four. Away we go, how are shares? I'm reading on the top of the page guys, how are shares in an E. T. F. Created or a deal? What I think we dealt with this in great detail. Okay. But just let's go through, make sure we can see all the numbers and make sure I haven't tried any tricks over here A. P. S. Are the parties that create and redeem the ETfs? Yeah. How did they do it guys, when we spoke about this, no money changes hands between the ap and the E. T. F. Issuer or the sponsor. Okay, that's a transaction in kind. Okay. Upon Creation the Ap gives a basket to the issuer. The issuer. Okay then gives shares to the Ap. And upon redemption, the ap will give the fans sponsor the shares and will take his basket back home. Okay? And where does he what does he do with the basket when he buys or sells it? Will ap buys and sells those stocks on the actual open market, doesn't he? Okay, good. And I'm not gonna spend too much time over here guys, We've dealt with the creation basket, we've dealt with Creation units and we've looked at the Creation the redemption baskets as well. Okay, so just very briefly, just to make sure we've got a complete understanding over here guys, you've only got the key parties over here guys, is your ap when you're a p is creating units, he passed that he takes his basket over to the the issuer. And what does he get in return? Well, he gets E. T. F. Shares. What do you do with the shares? Trade them on the market on the other side guys, when he is ready to redeem what does he give to the issuer? He gives the shares back to the Sure, and where is the issue? I give him in return. Give me Becky's basket. Where is he? Where does he get the basket from? God? Well, the basket is underlying stocks and lying commodity and lying whatever it happens to be. Okay, that's as simple as we can make it. Okay, let us move on a little bit over here, you get, you know, top of the next page, slide number five. It's important for the ap to keep the prices of the basket and that of the E. T. F. In a very close range if it wasn't. So guys, and we've spoken about this ad nauseam. Okay. Arbitrage opportunities would take place. Okay, and here's a nice little picture for you get um let's have a look over here when the E. T. F. Itself is trading at a discount. Okay. What what would happen? Okay. And I remember the E. T. F. Itself is cheaper. Okay, and it's so easy to remember this guys, what's trailing in a discount, the E. T. F. So which is cheaper, the E. T. F. So what would he do? He bars always buys cheaper. whenever you look at. Arbitrage, always buy the cheaper item. So over here what would he buy? He would buy the E. T. F. Shares, what would he sell the more expensive item Which is the underlying basket of security on the reverse side. Okay, let's have a look over here when the T. F. Is trading at a premium in in other words, winning trades on the secondary market. Okay, it's trading at a premium. Okay, it's too expensive. The E. T. F. What do you do to the T. F. You sell it? You sell the th what would you buy underlying securities? And this is the process guys on what we call creation and redemption. That's the process there nicely. Uh that lovely diagram. Okay, we look at here guys, we we we we focus on this concept called the arbitrage gap. Okay, and the arbitrage gap very simply, is the price that it would make sense for the ap to step into the market and either create or redeem the shares? Yeah. Now, remember, just in terms of liquidity, Okay, the more illiquid the market is not a liquidity in the market is not a lot of buying and selling. That gap gets bigger and bigger. Okay. It just becomes quite challenging to to go through that process due to the fact that there's not much liquidity uh in the market. Okay. One of the advantages, we haven't spoken about this, of the creation redemption process. Okay. Is that the ap himself being the, in a sense, the intermediary or the market maker? Okay. He takes up all the costs, the transaction costs of transaction transacting for the fund's portfolio. Okay. These will then be passed on to the investor via a bit asked spreads as he passes. Remember he is the essential market maker. So he will be the seller when he first creates those units and he passes those onto the market. He can recover some of his costs in that process. Okay. Okay. I'll page over here. This is what we talk about. I want slide seven for those that are falling along with us. Okay. This is the secondary market. Yeah. An investor wanting to purchase shares in an E. T. F. Contact his broker put through a purchase order to the market and then again just like any other stock that trades on the stock market, there's buyers and sellers. Okay. Um The market maker. Okay. He's there always to make sure that if someone wants to buy or some wants to sell that he's always there involved in the market is to make sure that the market runs smoothly. Okay. I'm not gonna spend too much time over here. Just give you a little bit of detail over there between how the market works on both the U. S. Side and on the european side as well. Okay, let's have a look at some key factors over here. This takes us back to portfolio management guys, key E. T. F factors. What are some of the key numbers over here? Number one is the expense ratio. Okay to manage an E. T. F. Okay, january is going to be less than that of managing a mutual fund. Okay. For the South African guys, we call that a unit trust and mutual fund. Okay. The expense ratios are generally much more transparent, invisible. Okay. Um and remember when two people have got are running in the TF separately TF and you've got a client that can see both of the fees quite transparently, fees generally tend to move quite effectively. Yeah it's when there's a lack of transparency. Okay that and things are not fully disclosed upfront. Um That things that they're they're they're pricing can tend to get a little bit um vague. I'll give you a little example that I had this last week For those that are by the way just a reminder as well for those that are CF a charter holders. Okay. It's time to pay your annual fees. Okay if memory serves it was about $300 which I had to pay last week and I'm not gonna give you any more details about the bank that I use but I paid the amount $300. Okay. Being a rand trans actor. Okay. I was quite mindful and I checked what the spot rate between the brand and the dollar was As I put my card through to make the my $300 payment. Okay have a look at this. The spot right at the time. Okay. It was 1425. In other words, 14 ran 25 to a dollar can and being on a credit card you just put your card to do okay on the system and it takes off that amount but you don't really get to see. It's not very transparent is not really clear how much what rate you're gonna get. Okay. But being mindful of that. I did the transaction, I did the conversion myself and I worked out the rand amounts that came off my card Divided by the $300. Okay. And surprise surprise this was the right that I got 14 85. Okay. Um and that to me was a bit of a lack of transparency and I'm not going to give you the bank. Of course not, that would be unprofessional, but I was a little bit shocked and I found the bank and I said, you know, do you know what they said? Yeah, they couldn't really help me. They put me through to someone that could and they're trying to explain it to me. That's the bid ask spread. Do I know about that? I said I do. I said but that's 60 cents. Um that's about four, nearly 400%. Um So and he said, well, you know, you could have phoned before we could have quoted. You're right, there's a story. Ok. But again, you can see there's not much transparency. When I spoke to a major mind that works in the foreign exchange markets, he said, well, on the bigger markets, that's very, very liquid and very, very transparent. He says, you'll never see anything like that. So it was quite glad of that, but you can see, you can see the difference is that when there are, when the markets are open and the pricing is very clear for all to see. Generally the pricing becomes quite quite a lot more competitive. Okay, so just be careful when you pay your Cf I fees, by the way. Okay, guys, we look over here. Okay, um and I'm moving to this concept, remember what I said earlier on in the presentation that will be dealing with this concept? Uh this particular topic falls under the area of portfolio management. Okay. We then come to a contact for tracking error. Tracking error is really nice and simple. Tracking error is just the difference or the standard deviation. Okay. Between what, between the E T. F and the underlying index? Remember what we said before. There shouldn't be a big tracking error in other words. Okay. The underlying E T. F. So the underlying assets should be worth 100 and the TF should be as close. There may be a little bit of a difference due to transition costs for Jerry. Not a huge difference at all. Okay, There we go. Okay, so the tracking error or the standard deviation? Okay. Between them should be very similar. Very close. Should be a very low tracking error for those that are familiar with another term. Okay, tracking areas often often referred to as active risk. Okay, Active, remember just we'll do build a revision over here for those that are interested. Remember guys, the other ratio that we often refer to when we're analyzing portfolio managers called the information ratio. Okay, what's the information ratio? Information ratio is Active return. How's that? Okay, tracking error. That's your formula. What's active return? Active return is the difference between the return on your portfolio. That's the return on the benchmark and again, the act of return on an E. T. F. Should be very little Because remember the return on your board, failure to return on the ETF should be very similar to to the benchmark to the S&P 500, for example, that you are tracking. Okay, So remember, TTF is very much of a passive type of a fund. I mean, you can you can get more active ones. Okay. But generally speaking, it's a very passive type of a fund and in general should match the index quite closely, which should result in low active returns and low tracking errors as well. Okay. However, having said that, why would you sometimes find the difference between, okay, the performance, the standard deviation of the performance on your E. T. F versus that of the underlying assets? Underlying index? Underlying asset, underlying commodity, whatever it happens to be, some sources of tracking error. Okay, fees and expenses. Maybe other fees, expenses involved. Okay. Um sometimes remember the what we call representative sampling the Okay. The fund may not fully or 100% exactly replicate the index, but have most of the shares of the index. Okay. Then you may get some tracking error. Talk about depository receipts. Okay. Again, different holdings changes in the index. Remember the index may change and the E T. F may not respond to that straight away. Different county practices from the fund tax and regulation and various asset manager operations. Okay. Um there may be other what we call negative costs that may okay, for example, they may lend out shares or things like that that may impact the performance of the TFC as well. Okay. Tax treatment Okay. We deal with two types of tax based evaluations. Okay. Um, and again, we look at what is the likelihood of distributing capital gains to shareholders? Okay. And again, what will happen upon the investors selling the HF? And these are the two key concepts that we work off when we look at treatment of E T. F. S on the tax side. Okay, good. And an interesting content over here, guys remember, yeah, that they are going to be what we call spreads between the bar the bids. Okay. And the ask the cell. Now, why would there be differences in the bid ask? Okay, between the buy and sell on an E T. F. Okay. And we look at and we'll do an example of this. It's a lovely example that that follows. Okay. Um what we say is that the bid ask spreads? Okay. Should equal the following factors. What are those factors? Okay. There are fees. So that's the plus and the minus of the creation redemption fees. Those fees need to be covered. Okay. The way that they will be covered is obviously that the authorized participant will charge a bit of a spread that's in the T. F. Spread. Okay. There may be bid ask spreads on the underlying securities as well. Remember when the ap goes into the market and bars and cells, those shares, there's a spread on those shares as well. Okay. The market maker may need to make some compensation is a bit of a profit that the market maker wants to make. Okay. And then maybe sometimes we we we we deduct the discount as well. Okay? Which which comes about, okay, we're receiving an offsetting E. T. F order. Okay. In a very short particular time period. Okay. However, remember the uh, E T. F that is uh traded more actively traded? More liquid should have a much narrower. Okay, a bit. Ask but ask, spread. Yeah. Good. Yeah. Um, and lets us move on over here guys. Okay, I'll come back to that. Hopefully we'll get a bit of time to look at a question on that as well. We have spoken about this one already. Top of a slide number 12, which are the E. T. F. Premiums and discounts. And have you remember again guys, is always going to be to prices that relate within the T. F. Space. Number one is the fund itself. Okay? We need to call those, those are the E. T. F. Shares, those trade on the market versus the net asset value. In other words, the underlying shares of the the T. F. Okay. Another, an interesting term you may hear this guys and this is called the Enev what's the N. F. Okay. Um, I indicated that Davies, those are the intraday estimates where the numbers are sitting during the day. Yeah. And E. T. F. Trading at a premium if what happens if the share price is greater than the N. A. V. We spoke about all these before and trading at a discount if the navy is greater than that amount and again, that will bring into play both creation redemption and in arbitrage on the part of the authorized participant. Okay. And here is just your calculations. If you if you are interested in today and end of day premiums or discounts and if you look at the calculation nice and simple. All we do is we take the price of the actually TF. In other words, what's the training on the secondary market at less than we'll call it a never either the Enev if you wanted it in today or you want to the navy for the end of the day. Okay. Divided by the either the N. F. With a knave itself that will give you a premium discounts because remember it's premium discounts to the net asset value. So that's why we always put the net asset value as a denominator. Okay. Okay. Our page over here, key drivers behind the why should there be differences? Can we look at timing differences? Often? Not everything works exactly coordinated. There may be a bit of a timing difference between the net asset values and the actual trading of the securities. Okay. And stale pricings. Okay. Obviously you won't find stale pricing when you're dealing with a more liquid traded uh instrument but some and E. T. F. That is traded quite a bit less. You may well get a bit of stale pricing over there. Okay. And then yes you're going to start to experience quite large discounts between the fund shares and the net asset values. Okay. Let's have a look over here. Let's talk about some costs of owning. And et if we talk about explicit explicit costs are costs that are explicitly we can see them implicit costs or costs that are there. Okay. But but not explicitly charged for anything of that nature. Okay. Let's have a look over here. Okay. Some of the let's go through the explicit costs first. Okay. Management fees, commissions charged. Okay. And tax charge taxable guides or taxable taxable losses. Okay. Good. Let's talk about the implicit some of the implicit costs. Well and what are those? Okay. Track. Era what's tracking area? That's the difference between the underlying. Okay. And the fund itself, there's a bid, ask spread premiums to discount portfolio turnover and any kind of security lending. And what we've got in the third column over here is do these costs? Is the holding period of factor get management fee? Okay. So over there. Yes, tracking error. Is it a function of the holding period? Yes. Okay. Um portfolio turnover? Yes. Tax yes. And security. Yes. Okay, let's go over our page over here. We're gonna try and wind up a little bit over here guys. And let's talk let's a little example of trading costs versus fees. Okay. To love you for example to try and illustrate how all the costs present themselves. Okay. And investor makes an et of trade to the value of $50,000. And here are some of his costs. Let's have a look over here commission. Okay? 0 .10% each way. So there's your $50,000 times not 0.1. Oh, here's your $50. Your spread is not 500.15%. That's your bid ask spread. And your management fees are not point 2%. OK, let's calculate the round round trip. Guys, what is a round trip mean? Okay, round trip means the overall cost from top to bottom start to finish. Okay. So he pays the one way commission, but he pays that twice because it's a buy and a sell. Okay. Times half the bid ask spread times to half the bid ask spread. Why why do I go in the middle of the bid ask spread. That's just an average. That's how we get a bit of an average. So does the bid ask spread? I add them together and I take half of it. In other words it's just an average again times to coming in and going out. What's my round trip cost? Well it's not .10%. That's the okay. The commission's Times two. And my bid ask spread is not .15 average times two. Okay. You can see in this case I didn't give you a spread too much more than that. Okay. Round two crossing all. .35%. Okay slightly. That's a fairly high cost. Okay. Uh And can depending on what the expense ratios of the T. F. Can even be higher than that sometimes. Okay. When we look over here, okay I'm sorry if I just take you back. So that was the cost of the E. T. F. We're going to be comparing that cost to management fees. Okay fees to manage a fund, for example, let's go over our page. Okay. Now the round trip cost is the cost, for example, on an E. T. F. Of getting in and getting out and it makes no difference. Okay. Whether you're in that E. T. F. For three months, Three years or what makes no difference because it's a round trip cost is based not on use, it's based on percentages. There's 9.35 we calculated if I just take you back a page The original .35%. Okay. Management fees or what is a fee for what? For the year? So If you're only in for three months you pay 9.2% times to over 12. Very cheap. Okay. On a one year basis. Well, you'll pay the full more 10.2 oh, if you're on the phone for three years, well that starts to roll a little bit of the costs quite extensively. Okay. And as you can see, the greater the percent. Okay. Uh the longer the time period, the greater the percent that management fees makeup of that total costs. Okay. We go with our page over here. Okay. We're just about done guys. Okay, slide 17 The various CTF risks. Okay. Counter party risk. Okay. Uh There are sometimes that the E. T. F. Structures deal with counter parties remain the military. What counter parties? Okay. Uh and dealing with a one on one person before you get to the exchange because the exchanges generate a lot more protective. We spoke about that before. Okay. Is you gotta counter party risk and risk is most people who were defined purposes? The deep risk of default credit risk, etcetera etcetera. Market spend too much more time uh On that one. Okay. Fund closures. Okay, what if the fund closes? Okay, well, then, if the fun closes or whatever shares, whatever asset underlies that particular fund? Well, those particular shares will be sold off and return them to the investors. Yeah. And that my may or may not be a good thing. Remember the minute anything gets sold. Okay. There may be tax consequences involved. Okay, pricing may be an issue as well. Okay, why do funds close certain regulations, regulatory causes may cause the fund to close down? Uh, competition. Okay. If an E. T. F. Fund cannot attract sufficient investors, well then was not enough interest in that particular E. T. F. That they can close down then as well. Corporate action mnh may force companies to merge or anything of that nature. We've got an interesting too much when I bring over here, creation halt. Okay. For example, there are times that the issuer may halt creation or redemptions. Okay? They say, uh, enough and then they may stop that that may cause further issues. Changing investment strategy, for example, the E T F and I don't want to be involved in this particular area any longer. These of course, cars are dealing with the risks of an E. T. F. Okay, investor related risk. Very important, of course. Guys that for investors to fully understand, remember when you invest in a T. F. All that you're investing in. Okay, essentially is what's underlying that. Okay, so if you invest in a platinum media for the you essentially investing platinum, you best understand the risks that are involved in platinum investing. Okay, also remember sometimes that E T. F may use leverage. Okay, understand exactly then what's related to leave it and how much leverage the, particularly if he's using. Remember we spoke right in the beginning about this concept called leveraged, sorry, called inverse cts. They work the other way around. So example when the market goes down and they go up, when the market goes down they go up again. Best we understand the detail behind inverse E. T. S before getting involved in those. We call those investor related risks. Yeah. Moving on to the next slide. Okay, what can you use? E. T. S. Four. Okay. They're very good at managing portfolios. Okay. They could have liquidity management. Okay. Let's say it's a very fancy word. I'm sure you guys have heard it before. Nothing new cash equitization. Okay. Often a fund will sit in with perhaps more cash than they need. Okay. But on the other hand, they're not ready okay to invest that cash in whatever instruments they're looking to invest in. So but they're sitting on cash, sitting on cash for too long within a portfolio is never a good thing. And we call that cash drag because it doesn't even a great return. Often what you can do with an E. T. F. Is you can just take your excess cash, pump it into something like uh an S. And P. 500 E. T. F. Which will give the fund access then to um the market. So they're not getting a cash rich and they're earning a market return now. And because it's so liquid, they can get in and out when they need that money back um in a hurry Cat, very good for rebalancing this example, they need to get into a bit uh high or low, for example, on equities. Or they could just quickly get in and out via an equity TF, just up their holdings or reduced their holdings completion strategies. Okay. For example, if they are low on a particular specific asset class, they can invest quickly into an asset class or reduced from an asset class quite quickly and transition management. Okay. For example, if they're in the process of hiring or hiring or firing managers, they may not want to make long term decisions at that point, but yet they still want access to the markets. Put it into an E. T. F. Okay, in those returns while you make your, your decisions. Okay over our page over here, asset class exposure management. Okay. Um, very quickly and very easily. Okay, a fund manager can gain exposure to certain assets via the T. F. If you have to say to a fund manager, we want exposure to gold and he's going to think, well, how do I get involved in gold? Okay, viney. TF could be nice. Quick. A quick and easy approach to getting involved. Okay, We look at tactical strategies as well. Okay. Tactical remembers generally a short term strategy to get involved in these particular particular assets. Okay. We look at active and factor investing. We look at smart, never know how to pronounce it. The smart meter or smart beta. Okay. Or factory TFC again, you can get involved in certain strategies via the E T. F. Remember, you can get involved into growth value E T F. Whatever you are looking specifically for. Okay. A very good at risk management. Yeah. You can manage your currency risk getting in and out duration, restoration risk is the fixed income risk. Okay? Um, alternatively we waited E T F s. Okay. Certainly wait the the E T. S differently. You can get involved as you need discretion, reactive E T F S. Okay. Excuse me. There are certain E T F that are more active than others and of course everybody can get involved to the level of activity. And remember generally we look at the T F is probably more of a passive type of investment, but if you need more of an active type of a look, you can get involved that way, dynamic acid location, our last point over here and multi asset managers. Okay, again, um asset managers, hedge funds, all those kind of parties can use these for getting in quickly in and out of various strategies that they may use. For example, macro strategies. Okay, A macro hedge fund may decide that they want to get involved in, uh certain strategies. Okay. Um and they can do that quite quickly and effectively by the use of E T F s. Okay, guys, that then brings us to the end of the presentation okay? Um If memory serves, we normally finish anywhere between two o'clock and 2 15 so we we we smack bang in the middle. Okay it's gone about eight minutes 10 minutes past two. Okay. The presentation as it stands over here guys I've left you then with a couple of questions. If you practice questions for you to have a look at the end, we always always present five practice questions. Okay I am going to take a quick look over here at the chat. If anybody has any questions please feel free to to ask your questions okay? Um I see at the moment there aren't any so we'll so we'll just give it a minute just to to see if there are any questions but if they're not okay you know and sometimes people may feel a little bit shy. Okay? Um Not a not a problem at all, doesn't it doesn't mean that you can't ask your question. Of course. What I'm gonna lead you leave you with guys obviously you know my name by now. Yeah. What I will leave you with is just some contact details. Um If you wish to to get hold of me um and ask any questions or ask for anything that you may need. Okay it's Russell and there's A J. At E B S dot c 0.0.0 and I'll leave you with a cell phone number. Feel free to call. I'm offered in classes as I am now of course. So leave a WhatsApp message already. We're gonna always do get back to you guys um over time. Okay. It's the number for you guys as well. Okay, I'm just gonna check again. It doesn't seem to be too many questions coming through. I do hope that is on account of the clarity or the ease of topic. The divers have managed to understand it and got benefit from it. Um and uh I hope everybody enjoyed on that note guys, we will then leave you, we will see you guys again in about a month's time. Okay, The topic that I've been presented with for um next month for the august presentation, I hope it, I know it did come from from from from you guys, so I hope it's of interest to you will be Fintech. Okay, so some lovely stuff coming up next month guys, everybody, I wish everybody a lot of health, wealth and happiness. Okay. During these trying and difficult times, these covid times, um wish everybody will and health and we will see you guys all that and going in about a month's time, cheers everybody