What is Exchange Traded Fund?
Exchange Traded Fund is a mutual fund that tracks an index, aims to reflect the performance of the index to investors. The shares of the exchange traded fund are traded on the stock exchange. Fund is composed by one-on-one replication of the index. Exchange Traded Funds combine high liquidity and trading easiness features of stocks with the features of mutual funds such as risk diversification and providing investors with the return of the invested markets. Exchange Traded Fund shares can be bought or sold like a stock by using a brokerage house.
What are the advantages of Exchange Traded Funds?
Ease of Transaction
Exchange Traded Funds, just like stocks, can be bought or sold during trading hours of Borsa Istanbul. Trades can be executed by all authorized brokerage houses. Settlement is 2 business days like stocks.
Exchange Traded Funds offer investors the chance to invest in a portfolio with a single transaction. While investors can diversify their risks by investing in a portfolio consisting of securities that are traded in Turkish Capital Markets instead of investing in a single security, they have the chance to be exposed to the market movements by the index they track.
Exchange Traded Funds offer all these advantages at a low cost. Exchange Traded Funds’ management fees are lower compared to other mutual funds. Additionally, for execution, investors only pay the brokerage fees charged by brokerage houses.
Exchange Traded Funds declare unit composition every trading day, so investors can follow the constituents on a daily basis.
Exchange Traded Funds announce their intraday net asset value every 15 seconds unlike other mutual funds which do that once a day. Thanks to this, investors can have idea about changing market conditions and how security prices affect the fund’s net asset value.
Is it easy to trade Exchange Traded Funds?
Exchange Traded Funds trade just like stocks. You can buy and sell exchange traded funds through the brokerage house you work with. Again, like stocks, settlement day is T+2 for exchange traded funds too.
What are risks of Exchange Traded Funds?
Exchange Traded Funds aim to reflect the return of the index they track. Therefore, if the index value depreciates, fund price may drop too. Securities in the portfolios of Exchange Traded Funds are kept in Borsa Istanbul Settlement and Custody Bank, as it is in the other mutual funds.
What is Net Asset Value?
It is the end of day fund price.
What is Intraday Net Asset Value?
Intraday Net Asset Value is the instantaneous net asset value. It shows the approximate fund value based on the market conditions at the moment it is published.
What is the Transaction Price?
It is the traded price on the Borsa Istanbul.
What is Unit Composition?
It is the portfolio structure that corresponds to a specific number of shares of the Exchange Traded Fund. In this way, investors can very transparently track their portfolio structure by following a portfolio composition for a specific number of shares, for instance 5.000 shares.
What is difference of Exchange Traded Funds and other mutual funds?
Exchange Traded Funds have major differences from other mutual funds;
• They trade on the Borsa Istanbul like a stock
• They disclose intraday net asset value
• They disclose portfolio composition every morning
• They have lower management fees
How are Exchange Traded Funds taxed?
The profits from transactions on mutual funds (including exchange traded funds) that are defined as “equity intense” according to Capital Market Board legislation (those funds that hold, as a monthly average, minimum of 75% of their portfolio in Turkish exchange traded equities) are subject to 0% withholding tax, the rest of the mutual fund transactions (including exchange traded funds) are subject to 10% withholding tax on the profits earned. The gains derived from the transactions of mutual funds (which are held continuously one year by the investors) are be exempted from the withholding tax if %51 of the portfolio of those funds are to consist of Turkish exchange traded equities.