Exchange Traded Funds: A Comprehensive Guide

Overview of Exchange Traded Funds (ETFs)

An Exchange Traded Fund (ETF) is a financial product offered by a Fund Management Entity (FME) that is mandatorily listed and traded on a recognized stock exchange in the International Financial Services Centre (IFSC). ETFs can come in various forms, including:

• Equity Index-based ETFs
• Debt Index-based ETFs
• Commodity-based ETFs
• Hybrid ETFs
• Actively Managed ETFs
• Other ETFs subject to approval from the recognized stock exchange and the Authority

This guide will provide valuable insights into the key characteristics, types, and requirements of launching ETFs while focusing on their unique aspects and the advantages they bring to the table.

Types of ETFs and their Key Characteristics

Equity Index-based ETFs

Replicates an equity index of IFSC, Indian, or foreign jurisdiction to the extent of at least 95% of total assets.

Debt Index-based ETFs

Replicates a debt index of IFSC, Indian, or foreign jurisdiction to the extent of at least 90% of total assets.

Commodity-based ETFs

Invests at least 90% in the specified commodity or related security/instrument.

Hybrid ETFs

Invests in two or more asset classes.

Actively Managed ETFs

FME has discretion over the composition of the portfolio subject to stated investment objectives and policies.

Launching an ETF

Only registered FMEs (Retail) can launch an ETF. To initiate the process, an ETF must be filed with the Authority, accompanied by the application fees. This needs to be done at least 21 working days before the ETF is set to launch. The FME must ensure that the Authority’s comments are duly incorporated into the offer document before the launch. Actively managed ETFs require the prior approval of recognized stock exchange(s) where the ETF aims to be listed.

Mandatory Listing on a Recognized Stock Exchange in IFSC

Units of ETFs must be listed on at least one recognized stock exchange within IFSC.

Direct Approach to the FME for Redemption of ETFs

Investors can directly approach the FME for the redemption of ETFs.

Exemptions from Exit Load Charges at the Time of ETF Units Redemption

No exit load will be charged at the time of ETF unit redemption if the following conditions are met:

• Traded Price (based on the closing price) of the ETF units is at a discount of more than 5% of the Net Asset Value (NAV) for continuous 30 trading days.
• No quotes are available on the recognized stock exchange for 5 consecutive trading days.
• The total bid size on the recognized stock exchange is less than a higher percentage of the total units valued at NAV in ETF or USD 2,500 in value, averaged over a period of seven (7) consecutive trading days.

Market Makers for ETFs and Their Roles & Requirements

It’s mandatory for FMEs to appoint a market maker for ETFs, who will be responsible for providing liquidity in the trading of ETF through two-way quotes. Market Makers can also create units and seek redemptions directly from the FME. Recognized Stock Exchange(s) must provide detailed rules for market makers addressing maximum spread, minimum quantity, incentives, margining, net-settlement, etc.

In summary, Exchange Traded Funds offer a diverse range of financial products, with various types available to cater to different investment needs. They must follow stringent guidelines and regulations to ensure investor protection and maintain the integrity of the ETF ecosystem. This comprehensive guide has thoroughly explored ETFs, enabling investors and FMEs alike to make informed decisions about launching and investing in ETFs.