Exchange Traded Funds - Structures, Mechanics and Investment Applications

2 days
Prague, NH Hotel Prague
  • Introduction to ETFs
  • Physical and Synthetic ETFs
  • Leveraged and Inverse ETFs
  • Creating, Redeeming, Pricing and Trading ETFs
  • Using ETFs to Reduce Deposit Outflows
  • Five Steps to Successful Investing with ETFs
  • Asset Allocation and Portfolio Management with ETFs
  • Core-Satellite and Upside-Down Investing with ETFs
  • ETF Risk Management and Regulation
A two-day practical course that will give you a solid foundation for successful investing with ETFs

The purpose of this unique, 2-day course is to give you a thorough introduction to the rapidly evolving world of ETFs and a good understanding of how these instruments can be used successfully for investing purposes. The course is highly relevant to institutional investors as well as to banks, brokerage firms and other providers of ETFs or ETF-related services.

We start with a general introduction to ETFs. We review the historical developments and we give an overview of different ETF types and legal structures. We thoroughly explain how ETFs are created, priced and traded. As a special case study, we also show how providing ETFs can be an interesting funding alternative for banks that are looking for ways to reduce potential deposit outflows and thereby help them manage the so-called Basel III "Liquidity Coverage Ratio", which will be phased in from 2015.

We shall look at "physical" as well as "synthetic", "inverse" and "leveraged" ETFs. We carefully explain their differences, advantages and disadvantages, illustrated by practical examples and case studies.

Further, we explain how ETFs can be used effectively for investing purposes. We explain discuss the sources of ETF returns, and we demonstrate how ETFs can be fitted into an overall asset allocation strategy. We also give examples of how these instruments can be used to implement specialized investment strategies such as "enhanced indexing", "core-satellite", "upside-down" and "negative duration" investing.

Finally, we explain how ETF risks can be measured and managed. We give an overview of the different types of risks and, using a comprehensive case study, we explain and illustrate how these risks can be managed at the portfolio level, and form an investor as well as a provider perspective. We also give an overview of regulatory developments and we discuss their possible implications for investors, providers and other market participants.

09.15 - 12.00 Introduction to ETFs

  • What is an “Exchange-Traded Fund”?
  • The Rationale for ETFs
  • ETF Legal Structures
  • Physical vs. Synthetic ETFs
  • ETFs Compared to Mutual Funds
    • Legal structures
    • Performance

The Mechanics and Economics of ETFs

  • How ETFs are Created and Traded
    • The creation and redemption process
    • The role of the “authorized market participant”
    • The ETF basket and the creation unit
    • How ETFs are traded in the secondary market
    • How ETFs are priced in the primary and secondary markets
  • Sources of Return in ETFs
    • Underlying asset classes and their returns (“beta”)
    • Securities lending fees
    • Generating “alpha” (actively managed ETFs)
    • Management fees and other costs
  • Special Case Study: How ETFs can be Used by Banks to Reduce Potential Deposit Outflows (Mitigating LCR risk)

12.00 - 13.00 Lunch

13.00 - 16.30 Synthetic, Leveraged and Inverse ETFs

  • Advantages and Disadvantages of Mechanics Synthetic ETFs
  • Main Differences between Physical and Synthetic ETFs
    • Underlying holdings
    • Counterparty risk
    • Sources of costs
    • Sources of tracking error
  • Unfunded Swap Structures
    • Using total return swaps to swap index returns with substitute basket returns
    • Resetting the swap to counterparty risk
  • Funded Swap Structures
    • Exchanging index returns for returns of a collateral pool
  • Exchange Traded Notes
  • Leveraged and Inverse ETFs
  • Practical Case Studies and Small Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Investment Strategies with ETFs

  • Fitting ETFs into an overall Asset Allocation Strategy
  • Five Steps to Successful Portfolio Management with ETFs
  • Implementing Passive Investment Strategies with ETFs
  • Enhanced Indexing Strategies
    • Enhanced cash
    • Index construction enhancements
    • Exclusion rules
    • Trading enhancements (algorithmic trading)
    • Portfolio construction enhancements
  • Core-Satellite Investing with ETFs
    • Static and dynamic core-satellite approach
    • Traditional and relative CPPI Approach
    • Controlling the risk of tactical bets with dynamic core-satellite portfolios of ETFs
  • “Upside-Down” Investing with Inverse and Leveraged ETFs
  • Investing with Rising Rate Protection Using “Negative Duration” ETFs
  • Creating Absolute Return Funds with ETFs
  • Measuring and Decomposing the Performance of ETF Investments
    • Tracking error and information ratio
    • Price efficiency
    • Manager efficiency
  • Case Studies and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 ETF Risk Management and Regulation

  • Risks of ETFs
    • Market risk
    • Tracking error risk
    • Rebalancing risks
    • Counterparty risk
    • Collateral risk
    • Legal risk
  • Case Study: Managing the Risks of an ETF Portfolio
  • ETF Regulation and Compliance
    • IOSCO principles for regulation of ETFs
    • ETF regulation in the U.S.
    • UCITS ETFs (EU)
    • ESMA guidelines (EU)

Evaluation and Termination of the Seminar

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