Update : Apr. 22, 2011
An ETF is an 'exchange traded fund'. It is an index-tracking investment trust which is listed and traded on a stock exchange market.
For example, TOPIX-based ETFs are made up of shares in the same proportion as the TOPIX index. Thus an investor buying a TOPIX ETF is essentially buying shares in the TOPIX index. The price reflects this correlation. Thus, at current levels the price of one TOPIX ETF would be 1,300 yen. As the trading unit for TOPIX ETFs is 100 units (or shares), this means that an investor can trade shares in the whole of the TSE First Section (=TOPIX) for just 130,000 yen.
One key characteristic of ETFs is that investors holding over a certain number of ETFs can exchange (redeem) these for a basket of shares. Conversely, investors with a basket of shares can use these to subscribe to an ETF. However, the minimum value needed for such redemptions and subscriptions is so high that only institutional investors and securities companies can afford to do so.
The main differences between ETFs and ordinary investment trusts are as follows:
The Nikkei 300 Trust is an investment trust which tracks the Nikkei 300, a weighted average index of 300 TSE-listed stocks. This trust was listed in 1995 on all Japanese stock exchanges. While both ETFs and the Nikkei 300 trust is similar in that they both track an index and can be traded on the TSE market at any time. The greatest difference is that, unlike ETFs, the Nikkei 300 trust only offers in-kind redemption, not in-kind subscription.
A defining characteristic of ETFs is that subscription is not cash-based, but instead investors deliver a basket of shares which accurately track the underlying index, as prescribed by the fund administrators. As the investors have already bought the stocks, there is no need for the fund administrators to take investors money to the market to buy stocks, thus considerably reducing operating costs. To take account of changes to the composition of the underlying indices, fund administrators publish daily lists of the basket of shares (which stocks and how many of each) necessary for subscription. An example of how this works is given below, using a Nikkei 225 ETF.
|beneficiary||Nikkei 225 basket of shares + cash portion||fund|
Subscription for TSE-listed ETFs is performed by authorised participants. The participants subscribe their baskets of shares, and then sell the resulting ETFs on the TSE market.
If securities companies or investors other than the authorised participants wish to subscribe to an ETF, they must do so through an authorised participant. However, as the huge costs involved (several hundred million yen) are prohibitive, most chose to buy ETFs on the TSE market, in the same way as trading stocks. For details of additional subscriptions, please see the individual ETF contracts.
Redemption is the reverse of subscription. In other words, investors receive a basket of shares in return for their ETFs. Unlike ordinary investment trusts which require the sale of assets on the market in order to return investors their money, ETFs return the assets (units of stocks mirroring the index) to the investor directly. Thus reducing costs. An example of how this works is given below, using a Nikkei 225 ETF.
|basket of Nikkei 225 shares|
If securities companies or investors other than the authorised participants wish to redeem an ETF, they must do so through an authorised participant. However, as the huge costs involved (several hundred million yen) are prohibitive, most chose to sell ETFs on the TSE market, in the same way as trading stocks. For details of redemption procedures, please see the individual ETF contracts.
As ETFs track the performance of a particular index, their base price is basically equivalent to the value of the index. An example of how this works is given below, using a Nikkei 225 ETF.
|Nikkei 225 14,067.70 yen||market increases by 1%||14,208.38 yen|
|base price 14,068 yen||14,208 yen|
Arbitrage trading taking advantage of the index-tracking nature of the ETF, as well as using subscriptions and redemptions, mean that ETFs offer a performance very similar to the underlying index.
Given their nature as stock investment trusts, and as stock exchange traded products, investors should bear the following points in mind when trading ETFs.
The main listing requirements for ETFs are sufficient liquidity and close tracking of the underlying index. The minimum number of trading units that must be listed is 10,000, which is 2.5 times the requirement for ordinary stocks. In terms of distribution, at least 1,000 beneficiaries must be recruited within a year of listing. An average monthly trading volume of at least 10 trading units must also be maintained. With regard to index tracking, ETFs must include at least 95% (by market capitalisation) of the index's composite stocks, and the net asset value (NAV) must be maintained at a ratio of at least 0.9 of the underlying index.
In the interests of transparency and user-friendliness, the following information must be disclosed.
Please see the following page to access a regularly updated list of TSE-listed ETFs.
1.Comprehensible & Easy to Use
4.Constant Trading during Auction Hours
ETFs are attractive products with a range of uses making them suitable for a wide range of investors.
ETFs are also ideal for those with experience of investment trusts, but who have not dabbled in individual stocks. As mentioned above, ETFs are easy to monitor as they track readily available indices. ETFs have the added benefit of being available for trading at any time during auction hours, unlike investment trusts, and fees and other costs are reduced.
For those with experience of margin trading, ETFs are a welcome new margin trading tool, offering investors the chance to take greater advantage of market prospects. The leverage (and associated risk) mean that investors will be able to mimic bull and bear index fund trading. ETFs offer the added benefit that they can be traded through out market hours.
Basically ETFs are traded in exactly the same way as stocks, there are no special rules. A brief outline of ETF trading on the TSE market is given below.
Settlement is the exchange of cash and securities to complete a transaction. Depending on the class of transaction, settlement is either same day or on the third day after the transaction (T+3), the same as for stocks.
The same kind of market information is available (from information vendors and securities companies) as for ordinary stocks, including prices, trading volume and value, best 3 quotes (both buy and sell) and pre-opening quotes.
Yes, margin trading is available for ETFs. In principle all ETFs are designated as margin issues upon listing, and where possible they will also be designated as loan issues.
Margin trading means trading using borrowed securities or cash in the hopes of making a profit by exploiting the upward or downward movement of the market before re-paying the loan. So for example, investors who think that the market will continue to decline will sell (using borrowed securities) on margin and then buy back at a lower price to replace those sold. Thus profiting from the price differential. Conversely, investors who think that the market will continue to rise will buy (using borrowed cash) on margin, then re-sell at a profit later. Margin transactions also allow investors to take advantage of the leveraging offered by the price fluctuations of deposited collateral - although this is balanced by the consequent risks. Basically, margin trading of ETFs is equivalent to bull and bear (see 13.5 for an explanation) index fund trading. However, unlike ordinary bull and bear fund trading, which require daily leveraging on the futures market and are thus more expensive and less cost-efficient, ETF margin trading does not incur any additional transaction costs as investors can enjoy the profits arising from the market price fluctuations of deposited collateral.
Unlike shares which are not subject to daily price limits on their first day of trading, it is easy to establish a base price from which to set daily price limits for ETFs even on their first trading day, as they are based on index. The base price for ETFs is the last value of the underlying index on the day before listing. This price will be published on the TSE website after the close of trading on the day before the ETF is due to list. Thus for example, for a TOPIX ETF which is listed the day after TOPIX is at 1,300 points, the daily price limits for the first day of trading will be 1,100 yen ~ 1,500 yen, in other words ± 200 yen. Subsequent daily price limits will be set on the basis of the preceding day's closing price (including closing quotes), the same as for ordinary stocks.
As mentioned above, ETFs are eligible for margin trading from the day they are listed.
Yes, ETFs can be traded on TSE's off-hours trading system, ToSTNeT. ToSTNeT offers investors a variety of benefits.
ToSTNeT Trading :
Short-selling is the sale of security that the investor does not possess, or which the investor has borrowed. Short-selling restrictions apply to ETFs. These restrictions apply to prices and the manner in which orders are displayed. However, given the nature of ETFs the following exemptions are planned.
(As for stocks, short-selling restrictions do not apply to margin transactions.)
Additionally, the following transactions are exempt from short-selling price restrictions.
ETF arbitrage trading offers investors the opportunity to exploit the price relationship between ETFs and the underlying index (stock prices), and as well as the ability to make in-kind subscriptions and redemptions. An example of an arbitrage transaction taking advantage of the fact that an ETF is priced above the underlying stocks. The investor profits from the net difference between the cash received for the ETF sold and the cash paid for the stocks (excluding loan fees, etc.)
|T||short sale of ETF at a high price||purchase of stocks need to subscribe, at low price|
apply for ETF
subscription using purchased stocks
|T+4||return of borrowed ETF||issue of ETF|
ETFs can also be used to arbitrage index futures positions. Thus allowing investors to choose between stocks and ETF arbitrage transactions on the basis of price.
ETF-holders are eligible for dividend payments on the basis of the dividends paid by the stocks held as assets. Thus, for transactions to be settled after the dividend payment day, the base price is adjusted accordingly - just like for stocks. The adjustment to ETF base prices does not take place until payment of the ETF dividends.
Settlement of ETF transactions takes place via the Japan Securities Depository Center (JASDEC) book-entry system. Just as JASDEC notifies issuers of the beneficial stockholders facilitating the payment of dividends to shareholders via trust banks, so it fulfils the same role for ETF-holders.
ETF transactions are subject to the same fees as stock transactions. These fees are determined by individual securities companies. Sales are also subject to taxation, basically the same as for stocks. Equally, just like ordinary investment trusts a certain proportion of the income from the assets held in trust are payable to the fund administrator. (These are indirect payments, not levied on individual transactions or dividend payments.)
The tax system of Exchange Traded Funds is the same as that of stocks.
ETFs on TSE is an area of the TSE website dedicated to the TSE ETF market. It features educational and PR materials. Explanations are given as to what an ETF is, how the market works and trading rules. Other information gives details oft listed ETFs and their daily disclosure updates showing the correlation between the net asset value (NAV) of the ETFs and the value of the underlying index, as well as portfolio composite files, giving details of the baskets of shares needed to subscribe to an ETF.
ETFs on TSE is a work in progress and we will continue working to provide as much information as is possible. ETFs on TSE can be found at the following web address:
Some of the key ETFs listed in the United States are SPDRs based on the S&P 500, Diamonds based on the Dow Jones Industrial 30, and Nasdaq-10, all listed by the American Stock Exchange (AMEX) in 1993, 1998 and 1999 respectively. There are now currently over 84 listed ETFs, in a variety of industrial sector and globally based indices. Since 1997, this market has grown significantly as a result of the stock market boom and the growing interest in index-based investment trusts shown by individuals, institutional investors and securities companies alike. AMEX is currently the world's leading ETF market.
Earlier this year, TSE signed a strategic alliance with AMEX, and looks forward to working with AMEX to promote the global ETF market.