Investor Pitch ETF as a investment frontier - does it work for everyone?

1. ETFs - A new investment frontier
SIDDHARTH CHAKRAVARTY

2. DISCUSSION POINTS
Investment vehicles
Active vs Passive
Money management
Fund performance
Investors
Fund Selection
Data Analysis
Conclusion

3. INVESTMENT VEHICLES
IMAGE SOURCE: GETTY IMAG
More Risk = More Reward | Pooled investments | Diversification
You can win
big, with risky
investments
Savings in account
below inflation will be
safe, but will lose value
• Growth stocks
• Small Cap Stocks
• Mutual funds
• Corporate bonds
• Zero coupons bonds
• Futures, Options &
Derivatives
• Low rated bonds
• Mining, precious metals
• Blue chip stocks
• High rate
corporate
• US Bonds
• Saving
account
• Money
market
• CDs
• T-bills
Source: Fidelity

4. ALPHA GENERATION
Money
management
Individual
ACTIVE PASSIVE
Institution
ACTIVE FUND PASSIVE FUND
Deciding whether you prefer your investment ‘actively’ or ‘passively’ managed is an
important consideration
Image: Shutterstock

5. ACTIVE vs PASSIVE
Is it better to invest your money passively, or invest
your money with top management?
Active funds try to beat the market
Passive funds try to be the market

6. Exchange Traded Funds
(ETFs)
oHarnesses the power of the market –ETFs are funds that track indexes
like the S&P 500, Dow Jones, Russell 1000, etc.,
o ETFs combine the range of diversification with simplicity of trading a
single stock
o Low management fees and administrative costs
o Tax efficient because they are less likely to experience trading of
securities which can create potentially high capital gains distributions
o Flexible: priced and traded continuously throughout the trading day,
can be bought on margin, sold short or held for the long term

7. MUTUAL FUNDS
o Primary goal is to outperform their benchmarks or peer group
average
oNet asset value (NAV), fluctuates based on the value of the securities
held by the portfolio at the end of each business day
oExperience and expertise of a professional management team
oHigher management fees and other expenses
oLiquidity: all mutual funds allow you to buy or sell your fund shares
once a day at the close of the market at the fund's NAV

8. 0 1 2 3
Vanguard
Pacific Investment
Capital
JP
FMR
Wellington
BlackRock Fund
T. Rowe
Northern…
US $ ( in trillions)
Manage US $16 T
(US GDP is ~ $17 T)
US Stocks
14%
Foreign
Stocks
6%
Bonds
50%
Short term
investments
30%
Typical Mutual fund basket Key players in Mutual fund market
Data source : Blackrock Mutual funds are the go-to investment vehicle
MONEY MANAGEMENT

9. You have to pay the Piper, Is it worth it ?
IMAGE SOURCE: GETTY IMAGES. Source: Data Provided By Morningstar Inc.
Mutual Fund expense ratio
1.460%
0.950%0.910%
0.180%
Average Weighted Avg.
Active Passive
Fund type Return Time (years) After 10 years
Active 5% 10 $ 14,174
Passive 5% 10 $ 14,945
$10,000 investment
Active Bond Funds Costs
$1.4 Billion Annually
MONEY MANAGEMENT

10. FUND PERFORMANCE
Data source : S&P500
91.91%
81.31%
84.62%
8.09%
19%
15%
One Year Three Year Five Year
% Funds underperformed % of Funds outperformed
Percentage Of Large-cap Funds that
underperformed the S&P 500®
(JUN 2016)
0%
5%
10%
15%
20%
25%
The top 20 as of Dec. 31, 2005
Ranked by 10-year returns
The same 20 funds in the
subsequent 10-year period
Of the 20 best-performing actively managed U.S,
only SEVEN were better than average over the next
decade.
AVERAGE U.S.
STOCK FUND
PERFORMANCE
Data source : Morning star

11. INVESTORS have noticed
75
-10
10
-5
95
-75
15
-120
25
20
260
5
300
-120
400
-200
2009 2010 2011 2012 2013 2014 2015 2016
Cash flow (in $US Billions) –
Invested in passive and active funds (2009-16)
• 2016 – investors put $600 billion more into passive funds than active funds.
10% increment in the number of
companies ownership of passive funds
0
50
100
150
200
250
300
350
400
450
500
2009 2010 2011 2012 2013 2014 2015 2016
S&P500companies
Data source : S&P500
PASSIVE
ACTIVE

12. Fund Sector Asset
allocation
Top Holdings Fees* Benchmark
Active
Vanguard 500 Index
Investor
Technology 98% US
stocks
US$316B
AAPL, MSFT, AMZN,
XOM
0.14% SP500
Vanguard 500 Index
Admiral
Technology
and Financial
98% US
stocks
US$ 315B
APPL, MSFT
WFC, BAC, JP
0.04% SP500
Vanguard Growth and
Income Fund Investor
Large Blend 99.7% US
stocks
US$ 7.4B
APPL, GOOG,
MSFT,JNJ, AMZN
0.34% SP500
Passive
SP500 ETF SPY Technology 99% US
stocks
US$ 53M
AAPL, MFT, AMZN,
FB
0.10% SP500
Financial sector SPDR Financial 99% US
stocks
US$ 64M
JPM, WFC, BOA,
Citi
0.14% SP500
iShares Core S&P 500 ETF Large Blend 99% US
stocks
US$ 109.2B
APPL, MSFT,
AMZN,FB, XOM
0.04% SP500
* Fees include Management fees, 12b-1 fees and other expenses
FUND SELECTION

13. 1
•Import data in R and analyze data
distribution
2
•Calculate for active, passive and benchmark
•Performance measurement
3
•Performance measurements – NET of fees
4
•Relative performance to benchmark
5
•CAPM analysis
DATA ANALYSIS: POINTS TO NOTE
1. R software was used, packages include:
Quantmod – return analysis
PerformanceAnalytics – comparing performance
Other supplementary packages: Zoo, XTS, Fbasics
2. Data compiled from Yahoo Finance
3. Adjusted returns were used and benchmarked
against SP500 total returns
4. Transaction and broker fees are not included
5. Management fees are deducted from returns
(assuming 250 day trading)
ANALYSIS APPROACH

14. SPY VFINX SP500
Annualized Return 5.34% 5.27% 5.39%
Cumulative Return 77.20% 75.87% 78.07%
SPY VFINX SP500
Fees 0.8% 0.14%
Annualized Return 5.26% 5.12% 5.39%
Cumulative Return 75.63% 73.17% 78.07%
SPY VFINX
Passive Active
SPY VFINX
▽-1.57% ▽-2.70%
CUMULATIVE RETURNS – GROSS AND NET FEES

15. IVV VQNPX
Passive Active
IVV VQNPX SP500
Annualized Return 5.4% 4.69% 5.39%
Cumulative Return 78.2% 65.6% 78.07%
IVV VQNPX
▽-0.79% ▽- 6.1%
CUMULATIVE RETURNS – GROSS AND NET FEES
IVV VQNPX SP500
Fees 0.04% 0.34%
Annualized Return 5.36% 4.34% 5.39%
Cumulative Return 77.41 59.49% 78.07%

16. XLF VFIAX SP500
Annualized Return -4.7% 5.3% 5.39%
Cumulative Return -41.20% 77.9% 78.07%
XLF VFIAX SP500
Fees 0.14% 0.04%
Annualized Return -4.75% 5.02% 5.39%
Cumulative Return -41.47% 71.36% 78.07%
XLF VFIAX
Passive Active
XLF VFIAX
▽ -0.27% ▽ -6.54%
CUMULATIVE RETURNS – GROSS AND NET FEES

17. RELATIVE PASSIVE RETURNS
Relative performance of IVV to SP500
Relative performance of SPY to SP500
Relative performance of XLF to SP500

18. RELATIVE ACTIVE
RETURNS
Relative performance of VFIAX to SP500 Relative performance of VQNPX to SP500

19. Fund strategy Passive Active
Fund name SPY XLF IVV VFINX VFIAX VQNPX
Alpha 0 -0.0004 0 0 0 0
Beta 0.9854 1.4920 0.9742 0.9996 0.9996 0.9992
R-squared 0.9816 0.7637 0.9897 1 1 0.9932
Annualized Alpha -6.00E-04 -0.0868 0.0004 -0.0025 -0.0035 -0.0098
Correlation 0.9907 0.8739 0.9948 1 1 0.9966
Correlation p-value 0 0 0.0000 0 0 0.0000
Tracking Error 0.0273 0.1941 0.0207 0.0011 0.0011 0.0167
Active Premium -0.0013 -0.1007 -0.0004 -0.0026 -0.0036 -0.0104
Information Ratio -0.0479 -0.5189 -0.0170 -2.3531 -3.3226 -0.6252
Treynor Ratio 0.0394 -0.0399 0.0406 0.0296 0.0363 0.0296
Sharpe
Ratio(Rf=1.3%)
0.194
-
0.173995
0.2016 0.1871
0.181199
6
0.1473
CAPM ANALYSIS

20. The choice between active and passive funds is not binary, but
depends on the investors risk appetite and preferences.
Perhaps, the best option may not be a binary option - passive or
active. but a combination of both.
CONCLUSION
”After costs, the return on the average actively managed fun will be less than the return on passively
managed dollar for any period
William F Sharpe

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Schwab.
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3. Balchunas, E. (2016). The Institutional ETF Toolbox: How Institutions Can Understand and Utilize the Fast-
Growing World of ETFs. New York: Wiley.
4. Dieterich, C. (2016, December 2016). Year in Review: 2016 Saw Record Flows to Index Funds. Retrieved
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index-funds-and-out-of-active-ones/
5. Joanne M. Hill, D. N. (2016). A Comprehensive guide to Exchange Traded funds (ETFs). New York: CFA
Institute Research Foundation.
6. Krouse, S. (2017, January 3). Fidelity Embraces What It Once Avoided: The ETF. Retrieved from Wall Street
Journal: https://www.wsj.com/articles/fidelity-embraces-what-it-once-avoided-the-etf-1483444801
7. Nigel Brashaw, A. O. (n.d.). ETF 2020 Preparing for a new horizon. New York: Pricewaterhouse Coopers.
8. Sarah Krouse, S. J. (2016, October 17). Why Passive Investing is Overrunning Active, in Five Charts.
Retrieved from Wall Street Journal: http://www.wsj.com/graphics/passive-investing-five-charts/
9. What are ETFs? Retrieved from Nasdaq: http://www.nasdaq.com/etfs/what-are-ETFs.aspx
10. ETFs vs Mutual Funds: Tax Efficiency. Retrieved from: https://www.fidelity.com/learning-
center/investment-products/etf/etfs-tax-efficiency
11. Kennedy, Mark (2016, November 1). Learn About the Benefits ETFs Have for Your Tax Return. Retrieve
from: https://www.thebalance.com/etf-tax-advantages-over-mutual-funds-1215121
REFERENCES