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A study on Exchange Traded Funds: main features and risks related to an innovative financial instrument

In the first chapter the candidate has traced the history of the Exchange Traded Funds, from the studies on the market efficiency in the 60ies, in which it is sustained the thesis of the impossibility to systematically beat the market performance because all the information is reflected in the prices, to the first primitive forms of ETFs and then the most important indexed funds: SPY, WEBS, DIAMONDS and CUBES.
In the second chapter there is a description of the ETFs, the main regulations in U.S. with the Investment Company Act of 1940 and the SEC, and in Europe with the Undertakings for Collective Investment in Transferable Securities that allowed the existence of synthetic ETFs. An explanation of the two replication techniques, physical and synthetic, tries to shed light on the mechanism of creation and management on an ETF understanding the main risks.
The third chapter explains the most important ETFs families: the leveraged ETF that wants to multiply the daily return of a target index and is advisable only to hedge positions and for short term investments; the industrial ETFs particularly useful in case a specific sector is performing better than the others or to invest in a selected industry that is not touched by an economical crisis; the international ETFs that are focused on a country or an area and allowed to invest in economies different from the national one, helpful in particular to enter in the emerging markets; the fixed income ETFs that simplify the way to invest in bonds, because
the fixed income indexed funds are traded on the market as shares with intraday pricing; the actively managed ETFs a new area that has to be yet explored, whose aim is to increase the purely passive performances of the traditional forms.
In chapter four is treated the theme of the Exchange Traded Commodities that are erroneously associated whit the ETFs, for the passive replication of a benchmark and the same mechanism of creation / redemption in kind, but basically different because they are not indexed funds, they are Zero Coupon Bonds issued by a special purpose vehicle.
In the last chapter there is an analysis of the tracking error of two ETFs with different structures, physical and synthetic, that replicate the FTSE Mib index, the most important Italian index. The analysis wants to understand the reasons of the tracking error looking at its evolution during the 2010 and evaluate the differences in term of performance between the two replication technique.

Mostra/Nascondi contenuto.
8 1. ETF historic profile 1.1. The efficient market theory With the studies on market efficiency of Eugene Fama in the middle of the 60s, was born the interest in instruments that replicate the market trend. In his Ph.D. thesis, he explained that the major markets are efficient, or in other terms that the prices reflect the information available. In his considerations he distinguishes between three efficiency forms: • Weak form: when the prices reflect the information embedded in the series of past prices; • Semi-strong form: when the prices, in addition to the series of past prices, reflect all the public information (for example dividends or earnings); • Strong form: when the prices reflect all the information, also the private one. This view means that, on average, it is not possible to over-perform the market. In fact, it is not possible to take advantage from the strategies of market timing and stock picking, because all the information is incorporated instantaneously in the prices. For these reasons technical and fundamental analyses are unhelpful. The technical analysis looks at past information to foresee the futures prices. It is based on the belief of the cyclical nature of the events: by studying the past observations, it is possible to predict the future trends and to obtain a profit. But if the prices reflect the past information, like in the weak efficiency form, it is evident that this type of analysis is absolutely useless, because the prices already consider this type of information. The fundamental analysis studies the intrinsic value of the stocks and tries to take advantage of the securities that are mis-priced. This is possible only if the prices do not reflect all the public information available and it is wrong for the market in semi-strong form, as Fama sustains. These considerations lead to the conclusion that, on average, an investor cannot obtain better results than the market and increase the interest in financial instruments that follow the market’s performances. To explain the concept in mathematical terms, Fama himself writes:

Laurea liv.II (specialistica)

Facoltà: Economia

Autore: Roberta Antonini Contatta »

Composta da 84 pagine.


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