1. What is an ETF?
According to Clause 42, Article 4 of the 2019 Securities Law, the term ETF is de
An Exchange-Traded Fund (ETF) is an open-ended fund formed through the receipt and exchange of a structured securities portfolio for fund certificates. ETF certificates are listed and traded on the trading system for listed securiti
An ETF operates similarly to an investment fund. It comprises a network of stocks, bonds, and other assets invested by a fund manager. Investors can buy and sell ETF shares on the stock market in the same manner
Additionally, the Intraday Net Asset Value (iNAV) per unit of an ETF is the net asset value per ETF unit determined during the trading session.
Thus, an ETF or Exchange-Traded Fund is an open-ended fund created by exchanging a structured securities portfolio for fund certificates. ETFs function as investment funds, investing in stocks, bonds, and other assets. The iNAV per ETF unit is the net asset value per ETF unit during the trading session.
2. What does an ETF’s portfolio include?
The ETF portfolio must align with the reference index portfolio regarding structure, asset allocation, and compliance with the deviation limit prescribed in Clause 1, Article 41 of Circular 98/2020/TT-BTC. The maximum deviation limit must not exceed the threshold set forth in the fund’s charter, stock exchange regulations, and applicable laws.
Clause 2, Article 45 of Circular 98/2020/TT-BTC specifies the composition of an ETF’s portfolio as follows:
- Deposits at commercial banks per banking laws.
- Money market instruments, including valuable papers and transferable instruments under financial regulations.
- Government debt instruments, government-guaranteed bonds, and local government bonds.
- Listed securities such as listed stocks, registered trading stocks, bonds on stock exchanges, and public fund certificates.
- Listed derivatives traded on stock exchanges solely for hedging risks associated with the underlying securities held by the fund.
- Rights associated with securities held by the fund.
Investing in derivatives is strictly for risk mitigation and minimizing deviation from the reference index.
Additionally, the ETF portfolio must adhere to the following principles:
- No investment in securities of a single issuer exceeding 10% of the issuer’s total outstanding securities, except for government debt instruments.
- No investment exceeding 20% of the fund’s total assets in securities or assets from a single issuer, except for government debt instruments.
- No investment exceeding 30% of the fund’s total assets in structured securities within the reference index portfolio issued by companies with ownership ties under the following cases: parent company, subsidiaries, or companies owning over 35% of each other’s shares.
- No investment in the fund’s own units.
- Investments in public fund certificates and listed investment company stocks managed by other fund management companies must comply with these restrictions:
- Not exceeding 10% of the total outstanding units of a public fund or investment company’s stocks.
- Not exceeding 20% of the fund’s total assets in a public fund or investment company.
- Not exceeding 30% of the fund’s total assets in public fund certificates or investment company stocks.
- No investment in real estate, unlisted stocks, or privately issued bonds, except for assets entitled to ownership benefits.
- No investment in securities issued by the fund management company or related parties, unless included in the reference index portfolio.
- Total derivative commitments and outstanding liabilities must not exceed the fund’s net asset value at any time.
3. Key Features of ETFs
The creation and redemption mechanism of ETFs minimizes capital gains distributions.
Flexibility and Transparency
- ETFs are listed on stock exchanges and can be traded like regular stocks.
- Real-time pricing and transparency in asset allocation make ETFs attractive to investors.
Cost Efficiency
- Lower expense ratios compared to mutual funds.
- Reduction in operational costs due to passive management strategies.
Liquidity: ETFs offer high liquidity, allowing investors to enter and exit positions easily during market hours.
Diversification: By holding a basket of securities, ETFs inherently provide diversification, reducing risk exposure.
Tax Efficiency: The creation and redemption mechanism of ETFs minimizes capital gains distributions.
4. Types of ETFs
ETFs cater to a broad spectrum of investment strategies and objectives. Common types include:
- Equity ETFs: These track stock indices such as the S&P 500 or VN30.
- Bond ETFs: Focus on government or corporate bonds.
- Commodity ETFs: Track commodities like gold, oil, or agricultural products.
- Sector and Industry ETFs: Specialize in sectors such as technology, healthcare, or real estate.
- International ETFs: Provide exposure to foreign markets.
- Inverse and Leveraged ETFs: Designed for sophisticated strategies, offering inverse performance or amplified returns relative to the index.
Example: VN30 ETF
A VN30 ETF mirrors the performance of the VN30 Index, which comprises the 30 largest and most liquid companies listed on the Ho Chi Minh Stock Exchange. By investing in this ETF, investors gain exposure to a diversified basket of top-performing stocks.
5. Investment Restrictions and Compliance
ETFs must adhere to strict regulations, including:
- Limiting investment in securities issued by a single entity to no more than 10% of its total outstanding securities.
- Ensuring no more than 20% of the fund’s total asset value is invested in securities issued by a single entity, except for government debt instruments.
- Avoiding investments in real estate, unlisted shares, or privately issued bonds unless these are rights granted to the fund.
- Prohibiting investments in fund certificates of the same fund or securities issued by the fund management company.
ETFs have emerged as a versatile and efficient investment vehicle, bridging the gap between traditional mutual funds and individual stock trading. Their unique structure, offering low costs, diversification, and transparency, makes them a compelling choice for both retail and institutional investors.
By understanding the features, types, and regulations governing ETFs, investors can harness their potential to achieve diversified, cost-effective exposure to various markets and asset classes.
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_Nguyen Thu Phuong_