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                         Exchange Traded Funds


INTRODUCTION :


An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges,
much like stocks. An ETF holds assets such as stocks or bonds and trades at
approximately the same price as the net asset value of its underlying assets over the
course of the trading day. Most ETF’s track an index, such as the Dow Jones Industrial
Average or the S&P 500. ETF’s may be attractive as investments because of their low
costs, tax efficiency, and stock-like features. In a survey of investment professionals
conducted in March 2008, 67% called ETF’s the most innovative investment vehicle of the
last two decades and 60% reported that ETF’s have fundamentally changed the way they
construct investment portfolios.

Only so-called authorized participants (typically, large institutional investors) actually
obtain or redeem shares of an ETF directly from the fund manager, and only then in
creation units, large blocks of tens of thousands of ETF shares that can be exchanged in-
kind with baskets of the underlying securities. Authorized participants may hold the ETF
shares or they may act as market makers on the open market, using their ability to
exchange creation units with their underlying securities to provide liquidity of the ETF
shares and help ensure that their intraday market price approximates the net asset value
of the underlying assets. Other investors, such as individuals using a retail brokerage,
trade ETF shares on this secondary market.

An ETF combines the valuation feature of a mutual fund or unit investment trust, which
can be purchased or redeemed at the end of each trading day for its net asset value, with
the tradability feature of a closed-end fund, which trades throughout the trading day at
prices that may be substantially more or less than its net asset value. Closed-end funds
are not considered to be exchange-traded funds, even though they are funds and are
traded on an exchange. ETF’s have been available in the US since 1993 and in Europe
since 1999. ETF’s traditionally have been index funds, but in 2008 the U.S. Securities and
Exchange Commission began to authorize the creation of actively-managed ETF’s.




STRUCTURE :
ETF’s offer public investors an undivided interest in a pool of securities and other assets
and thus are similar in many ways to traditional mutual funds, except that shares in an
ETF can be bought and sold throughout the day like stocks on a securities exchange
through a broker-dealer. Unlike traditional mutual funds, ETF’s do not sell or redeem their
individual shares at net asset value, or NAV. Instead, financial institutions purchase and
redeem ETF shares directly from the ETF, but only in large blocks, varying in size by ETF
from 25,000 to 200,000 shares, called "creation units." Purchases and redemptions of the
creation units generally are in kind, with the institutional investor contributing or receiving
a basket of securities of the same type and proportion held by the ETF, although some
ETF’s may require or permit a purchasing or redeeming shareholder to substitute cash for
some or all of the securities in the basket of assets.

The ability to purchase and redeem creation unit’s gives ETF’s an arbitrage mechanism
intended to minimize the potential deviation between the market price and the net asset
value of ETF shares. Existing ETFs have transparent portfolios, so institutional investors
will know exactly what portfolio assets they must assemble if they wish to purchase a
creation unit, and the exchange disseminates the updated net asset value of the shares
throughout the trading day, typically at 15-second intervals.

In the United States, most ETF’s are structured as open-end management investment
companies (the same structure used by mutual funds and money market funds), although
a few ETF’s, including some of the largest ones, are structured as unit investment trusts.
ETF’s structured as open-end funds have greater flexibility in constructing a portfolio and
are not prohibited from participating in securities lending programs or from using futures
                                                       [4]
and options in achieving their investment objectives. Under existing regulations, a new
ETF must receive an order from the Securities and Exchange Commission, or SEC, giving
it relief from provisions of the Investment Company Act of 1940 that would not otherwise
allow the ETF structure. In 2008, however, the SEC proposed rules that would allow the
creation of ETF’s without the need for exemptive orders. Under the SEC proposal, an ETF
would be defined as a registered open-end management investment company that:

      Issues (or redeems) creation units in exchange for the deposit (or delivery) of
       basket assets the current value of which is disseminated on a per share basis by a
       national securities exchange at regular intervals during the trading day;
      Identifies itself as an ETF in any sales literature;
      Issues shares that are approved for listing and trading on a securities exchange;
      Discloses each business day on its publicly available web site the prior business
       day's net asset value and closing market price of the fund's shares, and the
       premium or discount of the closing market price against the net asset value of the
       fund's shares as a percentage of net asset value; and
      Either is an index fund, or discloses each business day on its publicly available
       web site the identities and weighting of the component securities and other assets
       held by the fund.




The SEC rule proposal would allow ETF’s either to be index funds or to be fully
transparent actively managed funds. Historically, all ETF’s in the United States have been
index funds. In 2008, however, the SEC began issuing exemptive orders to fully
transparent actively managed ETF’s. The first such order was to PowerShares Actively
Managed Exchange-Traded Fund Trust, and the first actively managed ETF in the United
States was the Bear Stearns Current Yield Fund, a short-term income fund that began
trading on the American Stock Exchange under the symbol YYY on 25 March 2008. The
SEC rule proposal indicates that the SEC is not suggesting that it will not consider future
applications for exemptive orders for actively managed ETF’s that do not satisfy the
proposed rule's transparency requirements.

Some ETF’s invest primarily in commodities or commodity-based instruments, such as
crude oil and precious metals. Although these commodity ETF’s are similar in practice to
ETF’s that invest in securities, they are not "investment companies" under the Investment
Company Act of 1940.

Publicly traded grantor trusts, such as Merrill Lynch's HOLDRS securities, are sometimes
considered to be ETF’s, although they lack many of the characteristics of other ETF’s.
Investors in a grantor trust have a direct interest in the underlying basket of securities,
which does not change except to reflect corporate actions such as stock splits and
mergers. Funds of this type are not "investment companies" under the Investment
Company Act of 1940.

HISTORY :
ETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that
traded on the American Stock Exchange and the Philadelphia Stock Exchange. This
product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was
successful in stopping sales in the United States.

A similar product, Toronto Index Participation Shares, started trading on the Toronto
Stock Exchange in 1990. The shares, which tracked the TSE 35 and later the TSE 100
stocks, proved to be popular. The popularity of these products led the American Stock
Exchange to try to develop something that would satisfy SEC regulation in the United
States.

Nathan Most, an executive with the exchange, developed Standard & Poor's Depositary
Receipts (AMEX: SPY), which were introduced in January 1993. Known as SPDRs or
"Spiders," the fund became the largest ETF in the world. Other U.S. ETFs quickly followed
based on other broad market indexes.

Barclays Global Investors, a subsidiary of Barclays plc, entered the fray in 1996 with World
Equity Benchmark Shares, or WEBS, subsequently renamed iShares MSCI Index Fund
Shares. WEBS tracked MSCI country indexes, originally 17, of the funds' index provider,
Morgan Stanley. WEBS were particularly innovative because they gave casual investors
easy access to foreign markets. While SPDRs were organized as unit investment trusts,
WEBS were set up as a mutual fund, the first of their kind.

In 1998, State Street Global Advisors introduced the "Sector Spiders," which follow the
nine sectors of the S&P 500.

Since then ETFs have proliferated, tailored to an increasingly specific array of regions,
sectors, commodities, bonds, futures, and other asset classes. As of May 2008, there were
680 ETFs in the U.S., with $610 billion in assets, an increase of $125 billion over the
previous twelve months.
INVESTMENT USES :



ETFs generally provide the easy diversification, low expense ratios, and tax efficiency of
index funds, while still maintaining all the features of ordinary stock, such as limit orders,
short selling, and options. Because ETFs can be economically acquired, held, and
disposed of, some investors invest in ETF shares as a long-term investment for asset
allocation purposes, while other investors trade ETF shares frequently to implement
market timing investment strategies. Among the advantages of ETFs are the following:




      Lower costs - ETFs generally have lower costs than other investment products
       because most ETFs are not actively managed and because ETFs are insulated
       from the costs of having to buy and sell securities to accommodate shareholder
       purchases and redemptions. ETFs typically have lower marketing, distribution and
       accounting expenses, and most ETFs do not have 12b-1 fees.

      Buying and selling flexibility - ETFs can be bought and sold at current market
       prices at any time during the trading day, unlike mutual funds and unit investment
       trusts, which can only be traded at the end of the trading day. As publicly traded
       securities, their shares can be purchased on margin and sold short, enabling the
       use of hedging strategies, and traded using stop orders and limit orders, which
       allow investors to specify the price points at which they are willing to trade.

      Tax efficiency - ETFs generally generate relatively low capital gains, because they
       typically have low turnover of their portfolio securities. While this is an advantage
       they share with other index funds, their tax efficiency is further enhanced because
       they do not have to sell securities to meet investor redemptions.

      Market exposure and diversification - ETFs provide an economical way to
       rebalance portfolio allocations and to "equitize" cash by investing it quickly. An
       index ETF inherently provides diversification across an entire index. ETFs offer
       exposure to a diverse variety of markets, including broad-based indexes, broad-
       based international and country-specific indexes, industry sector-specific indexes,
       bond indexes, and commodities.

      Transparency - ETFs, whether index funds or actively managed, have transparent
       portfolios and are priced at frequent intervals throughout the trading day.

Some of these advantages derive from the status of most ETFs as index funds.
TYPES OF ETF’S :



Index ETFs

Most ETFs are index funds that hold securities and attempt to replicate the performance of
a stock market index. An index fund seeks to track the performance of an index by holding
in its portfolio either the contents of the index or a representative sample of the securities
in the index. Some index ETFs, known as leveraged ETFs or short ETFs, use investments
in derivatives to seek a return that corresponds to a multiple of, or the inverse (opposite)
of, the daily performance of the index. As of February 2008, index ETFs in the United
States included 415 domestic equity ETFs, with assets of $350 billion; 160
global/international equity ETFs, with assets of $169 billion; and 53 bond ETFs, with
assets of $40 billion.

Some index ETFs invest 100% of their assets proportionately in the securities underlying
an index, a manner of investing called "replication." Other index ETFs use "representative
sampling," investing 80% to 95% of their assets in the securities of an underlying index
and investing the remaining 5% to 20% of their assets in other holdings, such as futures,
option and swap contracts, and securities not in the underlying index, that the fund's
adviser believes will help the ETF to achieve its investment objective. For index ETFs that
invest in indexes with thousands of underlying securities, some index ETFs employ
"aggressive sampling" and invest in only a tiny percentage of the underlying securities.

Commodity ETFs

Commodity ETFs invest in commodities, such as precious metals and futures. Among the
first commodity ETFs were gold exchange-traded funds, which have been offered in a
number of countries. Commodity ETFs generally are index funds, but track non-securities
indexes. Because they do not invest in securities, commodity ETFs are not regulated as
investment companies under the Investment Company Act of 1940 in the United States,
although their public offering is subject to SEC review and they need an SEC no-action
letter under the Securities Exchange Act of 1934. They may, however, be subject to
regulation by the Commodity Futures Trading Commission.

Currency ETFs

In 2005, Rydex Investments launched the first ever currency ETF called the Euro Currency
Trust (NYSE: FXE) in New York. Since then Rydex has launched a series of funds tracking
all major currencies under their brand CurrencyShares. In 2007 Deutsche Bank's db x-
trackers launched EONIA Total Return Index ETF in Frankfurt tracking the euro, and later
in 2008 the Sterling Money Market ETF (LSE: XGBP) and US Dollar Money Market ETF
(LSE: XUSD) in London.
Actively managed ETFs

Actively managed ETFs are quite recent and have been offered only since 25 March 2008
in the United States. The actively managed ETFs approved to date are fully transparent,
publishing their current securities portfolios on their web sites daily. However, the SEC
has indicated that it is willing to consider allowing actively managed ETFs that are not
fully transparent in the future.

The fully transparent nature of existing ETFs means that an actively managed ETF is at
risk from arbitrage activities by market participants who might choose to front-run its
trades. The initial actively traded equity ETFs have addressed this problem by trading only
weekly or monthly. Actively traded debt ETFs, which are less susceptible to front-running,
trade their holdings more frequently.

The initial actively managed ETFs have received a lukewarm response and have been far
less successful at gathering assets than were other novel ETFs. Among the reasons
suggested for the initial lack of market interest are the steps required to avoid front-
running, the time needed to build performance records, and the failure of actively
managed ETFs to give investors new ways to make hard-to-place bets.




Exchange-traded grantor trusts

An exchange-traded grantor trust share represents a direct interest in a static basket of
stocks selected from a particular industry. The leading example is Holding Company
Depositary Receipts, or HOLDRS, a proprietary Merrill Lynch product. HOLDRS are neither
index funds nor actively-managed; rather, the investor has a direct interest in specific
underlying stocks. While HOLDRS have some qualities in common with ETFs, including
low costs, low turnover, and tax efficiency, many observers consider HOLDRS to be a
separate product from ETFs.

Leveraged ETFs

A leveraged exchange-traded fund, or simply leveraged ETF, are a special type of ETF that
attempts to achieve returns that are more sensitive to market movements than a non-
leveraged ETF. For instance, a bullish leveraged ETF might attempt to achieve daily
returns that are 1.5, 2.0, 2.5, or 3.0 times more pronounced than the Dow Jones Industrial
Average or the S & P 500. Leveraged ETFs require the use of financial engineering
techniques, including the use of equity swaps, derivatives and rebalancing to achieve the
               .
desired return
Expedited Decay

Leveraged ETFs have a potential costly problem of decay, because the value of the
leveraged ETFs are based on the MOVEMENT of the underlying indices, and not based on
the VALUE of the underlying indices.


Example:

Underlying index is trading at $100, a 3x bull ETF is current trading also at $100

Day 1:

The underlying index goes up 10%, finishing the day at $110

The 3x ETF goes up 30%, finishing the day at $130

Day 2:

The underlying index goes down 10%, finishing the day at $99

The 3x ETF goes down by 30%, finishing the day at $91

That is a decay of $8 more for the leveraged ETF compared to the index


All leveraged ETFs naturally decay, and at two different time periods, while the underlying
index may be trading at the same value, leveraged ETFs will trade at different values, with
the lower value at the later period. This is true for both bull and bear leveraged ETFs.

Due to decay, traditional investment strategies such as buy and hold, and averaging down,
do not work to the same extent as they work on common stocks and unleveraged ETFs.
Holding a leveraged ETF while its value is decreasing, to recover the value of the
leveraged ETF, the underlying index has to be much higher than when it was dropping.
POPULAR ETF’S :



Standard & Poor's 500 Index Depository Receipts (SPY: AMEX)

The first and still the biggest ETF, this inexpensive fund (pronounced Spiders) tracks the S
& P 500 index, which is widely regarded as the standard for measuring large-capitalization
U.S. stock market performance. Some selectivity by Standard & Poor's surrounds an
otherwise methodical list of the 500 largest traded firms.




Nasdaq-100 Index Tracking Stock (QQQ: AMEX)

Tracks the Nasdaq-100 index, which includes 100 of the largest companies listed on The
Nasdaq Stock Market based on market capitalization. It is widely perceived as a
technology benchmark and includes computer hardware and software,
telecommunications, retail/wholesale trade and biotechnology. It does not contain
financial companies or investment companies.




DIAMONDS Trust (DIA:AMEX)

This popular ETF Tracks the Dow Jones Industrial Average, a benchmark of 30 blue chip
stocks selected by The Wall Street Journal. The index is highly subjective and rather
antiquated in its formula but serves as a good barometer for very large old-line US
companies.




iShares S & P 500 (IVV:AMEX)

Barclays' slightly less expensive version of the SPDR tracks the S&P 500 index, which is
widely regarded as the standard for measuring large-capitalization U.S. stock market
performance. Some selectivity by Standard & Poor's surrounds an otherwise methodical
list of the 500 largest traded firms.




Standard & Poor's MidCap 400 SPDRs (MDY:AMEX)

Tracks the S & P MidCap 400 index, which measures the performance of the mid-size
company segment of the U.S. market and complements the S&P 500 seamlessly.
iShares Russell 2000 (IWM: AMEX)

Tracks the Russell 2000 index, a popular benchmark for mid- and small-cap companies.
The Russell 2000 Index represents the second tier of U.S. equities, or companies with
market values between $20 million and $300 million, which account for approximately 8 to
9 percent of the total market. Russell's methodology leads to relatively high turnover.




iShares MSCI EAFE (EFA: AMEX)

The iShares MSCI EAFE Index Fund tracks the MSCI EAFE Index, the top non-US large
capitalization index that includes all major economies (except US) and no emerging
markets. A popular way to gain foreign exposure.




Total Stock Market VIPERs (VTI: AMEX)

The Vanguard Group's core portfolio ETF tracks the Wilshire 5000 broad market index,
which is one of the broadest index for the U.S. equity market, measuring the performance
of the vast majority of all U.S. headquartered public companies. Considered an excellent
proxy to the US economy as a whole.




iShares SmallCap 600 (IJR:AMEX)

Tracks the S & P SmallCap 600 index, which measures the performance of the small-
capitalization US companies.




Consumer Services Select Sector SPDR (XLV:AMEX)

One of the many sector ETFs from S & P, which tracks consumer services companies
selected from the S&P 500 index.
WHY ETF’S ?
Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major
stock exchanges. Want to invest in the market quickly and cheaply? ETFs are the most
practical vehicle. They help the investor focus on what is most important, choice of asset
classes.

All the major stock indexes have ETFs based on them, including:

      Dow Jones Industrial Average
      Standard & Poor's 500 Index
      NASDAQ Composite

There are ETFs for large US companies, small ones, real estate investment trusts,
international stocks, bonds, and even gold. Pick an asset class that is publicly available
and there is a good bet that it is represented by an ETF or will be soon.

ETFs differ fundamentally from traditional mutual funds, which do not trade midday.
Traditional mutual funds take orders during Wall Street trading hours, but the transactions
actually occur at the close of the market. The price they receive is the sum of the closing
day prices of all the stocks contained in the fund. Not so for ETFs, which trade
instantaneously all day long and allow an investor to lock in a price for the underlying
stocks immediately.

ETFs are economical to buy and especially to maintain over the long-run, making them
especially attractive for the typical buy-and-hold investor. Annual fees are as low as .09%
of assets, which is breathtakingly low compared to the average mutual fund fees of 1.4%.
Although investors must pay a brokerage transaction to purchase them, with discount
brokers this becomes negligible with sizable trades. There are a few easy-to-avoid pitfalls
to watch out for. Tax effects are also not to be ignored, and ETFs perform well after-tax.
They can be margined, and options based on them allow for various defensive (or
speculative) investing strategies.

Their safety as a securities instrument (considered separately from the safety of any
particular asset class they might represent) is considered the same as stock certificates
themselves. Internally, ETFs are far more complex entities than mutual funds. A
fascinating combination of players, including brokers, money managers and market
specialists combine to make them run smoothly. Legally, ETFs are a class of mutual fund
as they fall under many of the same Securities Exchange Commission rules that traditional
mutual funds do. But their different structure means that the SEC has imposed different
requirements from traditional mutual funds in how they are bought and sold.

ETFs are index funds at heart, so investors are encouraged to study the philosophy of
index investing which downplays stock picking in favor of buying the market. But unlike
most traditional index funds, investors need not take a passive, buy-and-hold approach.
ETFs are also becoming favorites of hedge funds and day traders who like to pull the
trigger frequently. Both types of investors may coexist and in fact strengthen each other
by lowering overall transaction costs.
ETF’S COMAPARED TO MUTUAL FUNDS :


ETF Comparison - While similar to an index mutual fund,
ETFs differ from mutual funds in significant ways.


                                                            Index
                                                                             Individual
                  Attribute                      ETF        Mutual
                                                                               Stock
                                                             Fund
Diversification                                   Yes         Yes                 No
Traded throughout the day                         Yes         No                  Yes
Can be bought on margin                           Yes         No                  Yes
Can be sold short                                 Yes         No                  Yes
Tracks an index or sector                         Yes         Yes                 No
Tax efficient as turnover is low                  Yes       Possibly              No
Low Expense Ratio                                 Yes      Sometimes          Not a factor
Trade at any brokerage firm                       Yes         No                  Yes



ETF’s trade like shares while providing the diversification of managed funds. Their
performance closely tracks the investment returns of the shares making up the index.




Taxation

ETF’s are structured for tax efficiency and can be more attractive than mutual funds. In the
U.S., whenever a mutual fund realizes a capital gain that is not balanced by a realized loss,
the mutual fund must distribute the capital gains to its shareholders. This can happen
whenever the mutual fund sells portfolio securities, whether to reallocate its investments
or to fund shareholder redemptions. These gains are taxable to all shareholders, even
those who reinvest the gains distributions in more shares of the fund. In contrast, ETFs
are not redeemed by holders (instead, holders simply sell their ETF shares on the stock
market, as they would a stock, or effect a non-taxable redemption of a creation unit for
portfolio securities), so that investors generally only realize capital gains when they sell
their own shares or when the ETF trades to reflect changes in the underlying index. In
most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset
classes or categories.

In the U.K., ETFs can be shielded from capital gains tax by placing them in an Individual
Savings Account or self-invested personal pension, in the same manner as many other
shares.
Costs


ETFs trade on an exchange. Each transaction is subject to a brokerage commission.
Commissions depend on broker, with various "plans" and different conditions, so no
simple rule can be given. A "typical" schedule (at least in the United States) is $10 or $20,
increasing slowly, or not at all, for larger orders. What is clear, however, due to the quasi-
flat charge, amount invested has a great bearing; someone who wishes to invest $100 per
month may have 10% of their money vaporized immediately, while for someone making a
$200K investment, commission may be, essentially, negligible. Generally, mutual funds
obtained directly from the fund company itself do not charge a brokerage fee. Where low
or no-cost transactions are available, ETFs become very competitive.

Most ETFs have a lower expense ratio than comparable mutual funds. Not only does an
ETF have lower shareholder-related expenses but, because it does not have to invest cash
contributions or fund cash redemptions, an ETF does not have to maintain a cash reserve
for redemptions and saves on brokerage expenses. Mutual funds can charge 1% to 3%, or
more; index funds are generally lower, while ETFs are almost always in the 0.1% to 1%
range. Over the long term, these cost differences can compound into a noticeable
difference. An expense ratio is computed as an annualised percentage of assets rate.

ETFs are almost always compared to no-load funds, for the simple reason that, compared
to loaded funds, there is no comparison. A person investing $100K in a load fund may
have $5K disappear immediately, which is much higher than any conceivable brokerage
commission.

Mutual funds may also charge for too short a holding period, which is nonexistent with
ETFs. In fact, ETFs can be bought and sold in the same day, although it's not obvious that
it's a good idea. This has made ETFs subject of some criticism, since low fees may cause
investors to trade more quickly. In this view, traditional mutual funds are doing investors a
favor by charging fees such as front loads.
Trading


Perhaps the most important benefit of an ETF is the stock-like features offered. Since
ETFs trade on the market, investors can carry out the same types of trades that they can
with a stock. For instance, investors can sell short, use a limit order, use a stop-loss order,
buy on margin, and invest as much or as little money as they wish (there is no minimum
investment requirement). Also, many ETFs have the capability for options (puts and calls)
to be written against them. Mutual funds do not offer those features.

For example, an investor in a mutual fund can only purchase or sell at the end of the day
at the mutual fund's closing price. This makes stop-loss orders much less useful for
mutual funds, and not all brokers even allow them. An ETF is continually priced
throughout the day and therefore is not subject to this disadvantage, allowing the user to
react to adverse or beneficial market condition on an intraday basis. This stock-like
liquidity allows an investor to trade the ETF for cash throughout regular trading hours, and
often after-hours on ECNs. ETF liquidity varies according to trading volume and liquidity
of the underlying securities, but very liquid ETFs such as SPDRs can be traded pre-market
and after-hours with reasonably tight spreads. These characteristics can be important for
investors concerned with liquidity risk.

Another advantage is that ETFs, like closed-end funds, are immune from the market timing
problems that have plagued open-end mutual funds. In these timing attacks, investors
trade in and out of a mutual fund quickly, exploiting minor variances in price in order to
profit at the expense of the long-term shareholders. With an ETF (or closed-end fund) such
an operation is not possible—the underlying assets of the fund are not affected by its
trading on the market.

Investors can profit from the difference in the share values of the underlying assets of the
ETF and the trading price of the ETF's shares. ETF shares will trade at a premium to net
asset value when demand is high and at a discount to net asset value when demand is
low. In effect, the ETF is providing a system for arbitraging value in the market. As the
initial costs are one-off, the ETF vehicle offers some cost advantages over other forms of
pooled investment vehicles.
Criticism

John C. Bogle, founder of The Vanguard Group, a leading issuer of index funds (and, since
Bogle's retirement, of ETFs), has argued that ETFs represent short-term speculation, that
their trading expenses decrease returns to investors, and that most ETFs provide
insufficient diversification. He concedes that a broadly diversified ETF that is held over
time can be a good investment.

ETFs are dependent on the efficacy of the arbitrage mechanism in order for their share
price to track net asset value. While the average deviation between the daily closing price
and the daily NAV of ETFs that track domestic indexes is generally less than 2%, the
deviations may be more significant for ETFs that track certain foreign indexes. The Wall
Street Journal reported in November 2008, during a period of market turbulence, that some
lightly traded ETFs not infrequently had deviations of 5% or more, exceeding 10% in a
handful of cases, although even for these niche ETFs, the average deviation was only a
little more than 1%. The trades with the greatest deviations tended to be made immediately
after the market opened.

ETFs offer little or no advantage over index funds for tax-deferred, long-term, retirement
investors, because such investors typically conduct little if any trading and tax issues are
of little concern for them.

In a survey of investment professionals, the most frequently-cited disadvantage of ETFs
was the unknown, untested indexes used by many ETFs, followed by the overwhelming
number of choices.

Some critics claim that ETFs can be, and have been, used to manipulate market prices,
including having been used for short selling that has been asserted by some observers
(including Jim Cramer of theStreet.com) to have contributed to the market collapse of 2008




CONCLUSION

ETFs have a lot to offer. They're flexible and low-cost, and their underlying portfolios are
protected from the impact of investor trading, making them more tax-efficient than most
mutual funds. There are also ETFs that address specific subsectors that regular mutual
funds do not.

Nevertheless, look carefully before you leap. ETFs cost advantage isn't always as large as
it might seem, and trading costs can quickly add up. Particularly if you're in the market for
a fund that tracks a broad index such as the NSE Nifty, or if you wish to invest regular
sums of money, it's tough to make a case yet for choosing an ETF over one of the existing
low-cost mutual-fund options.

				
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