ETF - Exchange-traded funds coming to RP bourse

By Daxim Lucas
Philippine Daily Inquirer
First Posted 17:31:00 03/09/2008

INVESTORS in the local equities market may soon be able to buy securities that mimic the performance of indices or baskets of stocks as part of the bourse's drive to broaden its client base.

In a statement, the Philippine Stock Exchange (PSE) said that it recently drew up draft rules that it proposes to govern the listing of exchange-traded funds (ETFs).

An ETF is an open-end fund that issues and redeems securities on demand, whenever investors put money into or take it out of the instrument. The ETF tracks indices or a basket of securities that are listed and traded in the PSE or on a foreign stock exchange acceptable to the PSE.

It is designed to track the price and yield performance of its underlying index, which may be categorized as a broad market, a sector or industry, a single country or region, or fixed income instruments.

PSE president Francis Lim said the decision of the PSE board to draft the ETF rules formed part of its program "to assure the market's sustained growth" by enticing more investors with an expanded menu of PSE products and services.

The bourse is urging all concerned groups to comment on the draft rules, which can be accessed through the PSE website. After the public comments are considered, the PSE will submit the draft rules to the Securities and Exchange Commission for approval.

source: http://business.inquirer.net

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Exchange-Traded Funds (ETFs)

Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs), but that differ from traditional open-end companies and UITs in the following respects:

• ETFs do not sell individual shares directly to investors and only issue their shares in large blocks (blocks of 50,000 shares, for example) that are known as "Creation Units."
  
• Investors generally do not purchase Creation Units with cash. Instead, they buy Creation Units with a basket of securities that generally mirrors the ETF’s portfolio. Those who purchase Creation Units are frequently institutions.
  
• After purchasing a Creation Unit, an investor often splits it up and sells the individual shares on a secondary market. This permits other investors to purchase individual shares (instead of Creation Units).
  
• Investors who want to sell their ETF shares have two options: (1) they can sell individual shares to other investors on the secondary market, or (2) they can sell the Creation Units back to the ETF. In addition, ETFs generally redeem Creation Units by giving investors the securities that comprise the portfolio instead of cash. So, for example, an ETF invested in the stocks contained in the Dow Jones Industrial Average (DJIA) would give a redeeming shareholder the actual securities that constitute the DJIA instead of cash. Because of the limited redeemability of ETF shares, ETFs are not considered to be—and may not call themselves—mutual funds.
  

An ETF, like any other type of investment company, will have a prospectus. All investors that purchase Creation Units receive a prospectus. Some ETFs also deliver a prospectus to secondary market purchasers. ETFs that do not deliver a prospectus are required to give investors a document known as a Product Description, which summarizes key information about the ETF and explains how to obtain a prospectus. All ETFs will deliver a prospectus upon request. Before purchasing ETF shares, you should carefully read all of an ETF’s available information, including its prospectus.

Currently, all ETFs seek to achieve the same return as a particular market indexes. Such an ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index.

source: www.sec.gov/answers/etf.htm

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