Exchange-traded Funds: gaining ground

The ETF market has doubled in size since 2010. According to Hedge Fund Research, net inflows were higher for ETFs in the first half of 2015, averaging USD 152.3bn, compared to USD 39.7bn flowing into Hedge Funds. Exchanged Traded Funds (ETFs) are the new ‘hot kid on the investment block’; ETFs were first been traded in 1993 and as at May 2015, hold over USD 3.015 trillion globally. 

The popularity of ETFs can be easily explained; ETFs are passively managed index funds which normally track an index, for instance S&P 500, Japan’s Nikkei, MSCI Germany etc., with the objective to participate in the economic growth of an industry, sector, commodity or index. ETFs are an investment vehicle traded on a stock exchange just like shares.  As such, they offer investors the advantages of a normal index fund (mutual fund) with some added benefits. 

From an investor point of view, the main advantages that ETFs offer are:

•    Lower fees; ETFs are usually passive in nature - they track a specific index so portfolio managers don't make active decisions about which securities to buy and sell, and this give rise to a lower fee structure compared to managed funds.
•    Highly liquid as it trades like a share.
•    Tax efficient, as investors usually pay less than mutual funds in capital gains tax thanks to the way that they are structured, and the potential absence of long-term capital gains.
•    Diversification, as ETFs can give exposure to a group of equities, market segments or asset classes. Also, the diversified portfolio of ETFs, usually make it less volatile.
•    As they trade like stocks, it allows investors to buy on margin or trade futures and options.
•    Transparent, as the performance of ETFs and portfolio composition are a reflection of the underlying index.

The Stock Exchange of Mauritius (SEM) allows for the local listing of ETFs. The Securities Act 2005 was amended in 2013 to include Exchange Traded Funds as securities. This has enlarged the scope of the types of securities offered in Mauritius. There are already a number of ETFs listed on the SEM. 

Cim Global Business is experienced in the formation and administration of ETFs and recently secured another ETF of an international fund manager for a primary listing on the SEM, and secondary listing on a regional stock exchange. The ETF tracks the S&P 500 stock market index.

Depending on your investment strategy, Cim Global Business can structure your ETF either as an Investment Company or Collective Investment Scheme.

Cim Global Business will be pleased to assist you in the formation, administration and legal considerations for ETFs and our services include: 

•    Preparing the constitutive documents of the ETF which includes drafting of the Constitution for the investment manager
•    Preparing the listing particulars and assisting with listing on the SEM
•    Application for licenses with the Financial Services Commission and SEM
•    Administering the ETF and dealing with market makers

We are of the view that ETFs will continue to grow in popularity as investors get to better understand this investment option.

If you wish to have further information on how Cim Global Business can establish and administer your ETF structure, please call your dedicated relationship manager or Gary Gowrea on +230 213 8924  or gary.gowrea@cimglobalbusiness.com

Disclaimer: The information on this document is provided in good faith and, whilst every care has been taken in the preparation of information, no responsibility is accepted for any errors. One must seek one’s own advice, opinion, memorandum or information before making any investment, business or other decisions.

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Source: BlackRock, Stock Exchange of Mauritius, ETFGI Hedge Fund Research