Exchange-Traded Funds as an Investment Option PDF
Preview Exchange-Traded Funds as an Investment Option
EXCHANGE-TRADED FUNDS AS AN INVESTMENT OPTION This page intentionally left blank Exchange-Traded Funds as an Investment Option A. SEDDIK MEZIANI © A.Seddik Meziani 2006 All rights reserved.No reproduction,copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced,copied or transmitted save with written permission or in accordance with the provisions of the Copyright,Designs and Patents Act 1988,or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency,90 Tottenham Court Road,London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published in 2006 by PALGRAVE MACMILLAN Houndmills,Basingstoke,Hampshire RG21 6XS and 175 Fifth Avenue,New York,N.Y.10010 Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St.Martin’s Press,LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States,United Kingdom and other countries.Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-51625-4 ISBN 978-0-230-51337-2 (eBook) DOI 10.1057/9780230513372 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 15 14 13 12 11 10 09 08 07 06 To the memory of my father,who esteemed learning and aspired to it,though life’s circumstances and vicissitudes denied him the opportunity This page intentionally left blank Contents List of Figures xi List of Tables xii List of Boxes xiv Acknowledgements xvi Preface xviii 1 Active versus Passive Investing 1 Introduction 1 Implementing an Asset Allocation:A Passive or Active Approach? 1 The Efficient Market Theory 2 Expanding the Scope of Indexing 12 Measure of Bond Performance 15 Summary 19 2 Security Market Indexes 21 Introduction 21 Factors Underlying the Demand for Security Market Indexes 21 Main Differentiating Characteristics of Market Indexes 23 Other Stock Indexes 30 Bond Indexes 35 Summary 38 vii viii CONTENTS 3 Exchange-Traded Funds versus Mutual Funds – Weighting the Options 40 Introduction 40 Structure of ETFs 40 Trading ETFs 43 Impact of New Factors on the Liquidity of ETFs 48 Lower Management Fees 50 ETFs Drawbacks 55 Summary 57 4 Tax Advantages of Exchange-Traded Funds 58 Introduction 58 The Rebalancing Process 58 Taxable Gain at the Inception of Investment 60 Redemption in Stock or in Cash 61 Tax Efficiency of Redemption 62 Tax Consequences on ETF Shareholders 66 Summary 69 5 Tax Savings of ETFs over Mutual Funds:A Case Study 70 Inroduction 70 Actual Tax Savings:Methodology 70 Tax Efficiency,but… 80 Other Considerations Underlying this Tax Advantage 83 iShares on Benchmark S&P 500 85 Summary 90 6 Evolution and Outlook of Equity ETFs 91 Introduction 91 History of Equity ETFs 91 Exchange-Traded Funds by Asset Category 96 ETF Outlook 108 Sources of Information 116 Summary 120 7 Fixed-Income ETFs 121 Introduction 121 Circumstances Surrounding the Launch of Fixed-Income ETFs 122 Current Product Universe 126 ETF Advisors’Fixed Income Trust Receipts or FITRS 133 General Features and Benefits 135 Out of the Gate 137 Summary 141 CONTENTS ix 8 Exchange-Traded Funds and the Wash-Sale Rule: New Twists on an Old Plot 143 Introduction 143 Investors have become More Tax-aware 144 Tax-Loss Offset Strategies based on Securities Swaps 146 Tax-Loss Offset Strategies as they Apply to Investment Products other than ETFs 147 Tax-loss Offset Strategies as They Apply to ETFs 149 Could Stocks and ETFs Possibly Constitute “Substantially Identical Securities”? 158 Summary 159 9 Anatomy of the ETF Landscape in Europe: General Market Conditions 161 Introduction 161 Common Features but… 162 Anatomy of Europe’s ETF Market 166 Asset Allocation 173 Actively Managed ETFs 176 Summary 179 10 ETFs for Europe and Other Market Exposures 181 Introduction 181 Traditional Methods of Investing in Foreign Securities 181 Global Asset Allocation with MSCI’s iShares 186 International ETFs Tracking Indexes Other than MSCI’s 194 International ETFs Trading in Foreign Markets 198 Concerns and Other Points of Interest 214 Summary 225 11 The Advent of ETFs in Imperfect Markets:Case of Mainland China 227 Introduction 227 Brief Overview of China’s Markets 228 Index Review 233 China’s ETFs 237 Are China’s ETFs an Idea Whose time has Come? 242 Summary 246 12 Long–Short Investment Strategies using ETFs 248 Introduction 248 Essentials of Short Selling 249 Short Selling with ETFs 251
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