Exchange Traded Funds Sovereign Wealth Funds, Transfer Pricing, & Cyber Crimes: Sovereign Wealth Funds, Transfer Pricing, & Cyber Crimes

By John E. Baiden

This book is intended to fill the void in topics not typically or fully captured by most business degree programs, but yet needed by business graduates to make their enlightenment complete or near complete. Up and Coming Business Students, Policy Makers and Informed Readers can also find this book very useful.

• Language: English
• Publisher: Xlibris US
• Release date: Jul 12, 2012
• ISBN: 9781477125724

Book preview

Exchange Traded Funds

Sovereign Wealth Funds,

Transfer Pricing, & Cyber Crimes

JOHN E. BAIDEN, B.Sc., MBA, M.Sc.

(distinction), JD, LL.M (distinction)

Central University College, Ghana

Copyright © 2012 by John E. Baiden.

Library of Congress Control Number: 2012910270

ISBN: Hardcover 978-1-4771-2571-7

Softcover 978-1-4771-2570-0

Ebook 978-1-4771-2572-4

All rights reserved. No part of this book may be reproduced or transmitted

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without permission in writing from the copyright owner.

This is a work of fiction. Names, characters, places and incidents either are the

product of the author’s imagination or are used fictitiously, and any resemblance

to any actual persons, living or dead, events, or locales is entirely coincidental.

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Contents

EXCHANGE TRADED FUNDS

SOVEREIGN WEALTH FUNDS

TRANSFER PRICING

CYBERCRIMES

EXCHANGE TRADED FUNDS

INTRODUCTION

Exchange Traded Funds (ETFs) are simply a basket of securities, usually stocks, that is designed to track a market benchmark. It may follow a broad-based index such as the Standard & Poor’s 500, or a more specialized area, such as health care companies or Chinese stock.¹ As it has Exchange in its name, ETFs are traded on a stock market or an organized market where it is registered, so they can be bought and sold just like regular shares of stock.

In recent times, Exchange Trade funds are viewed as one of the most, dynamic and complex investment vehicles. The first ETF was created in 1993. In the past 16 years ETFs have grown to well over 600 attracting more than half of trillion dollars in investments.² David Haywood of Financial Research Corporation predicts that "the market for Exchange Trade Funds will grow at 29 percent clip over the next five years out pacing all other investment Products. ³

Also affecting the growth and popularity of ETF’s are several prominent financial economists, funds sponsors, and academics who have endorsed the use of these funds.⁴ Robert Sholler, author of Irrational Exuberance, for example, is a backer of the fund sponsor, Claymore MACRO Shares.⁵ Also, David Swensen who oversees Yale University’s outperforming endowment advocates the use of ETFs in his book, Unconventional Success.⁶ Jeremy Siegel, a professor at the Wharton School of Business and the author of Stocks for the long run, is an adviser to Wisdom Tree, an innovation ETF sponsor. ⁷ Burton Malkiel, Professor of Economics at Princeton University and author of bestseller, a Random Walk Down Wall Street, is also an enthusiast of ETFS.⁸

Exchange Trade Funds are securities that provide the diversification of a mutual fund but trades on a securities Exchange like a stock. With ETF sponsors aggressively seeking to create novel kinds of ETFs and to include ETFs in retirement financial plans, these funds are projected to continue growing at a pace far faster than hedge funds and mutual funds in the coming years. ETFs have grown as a result of difficulties in the Mutual Funds industry. With this phenomenal growth it is worth investigating the reasons behind the growth. This literature intends to explore the History of ETFs, Structure, Advantages, Disadvantages and ETF’s Legal Environment.

ETFS—WHAT ARE THEY?

There is no uniform or official definition of an Exchange Trade Funds (ETFs) however, most definitions describe ETFs as a security that provides the diversification of a mutual funds but trades on a securities exchange like a stock. The Investment Company Institute (ICI) for instance, defines Exchange Traded Fund as an investment company that offers investors a proportionate share in a portfolio of stocks, bonds or other securities. Like, individual equity securities, ETFs are traded on a stock exchange and can be bought and sold throughout the day through a broker—dealer.⁹

The State Street and Wharton Study define ETF as an investment vehicle traded on Stock Exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trade at approximately the same price as the net asset value of its underlying assets over the course of the trading day.¹⁰ Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investment because of their low costs, tax efficiency, and stock—like features.¹¹

ETFs are securities that closely resemble index funds, but can be bought and sold during the day, similar to common stocks. These investment vehicles give investors a convenient way to purchase a broad basket of securities in a single transaction. Essentially, ETFs offer the convenience of a stock along with the diversification of a mutual fund.¹² According to the SEC, ETFs are investment companies that are legally classified as open-ended companies or Unit Investment Trusts.¹³

Exchange Trade Funds are relatively recent innovation to the investment company concept. Similar to traditional mutual fund and other investment company offerings ETFs offer investors, including those of moderate means, the opportunity to purchase shares in a diversified pool of securities at a competitive price.

ETFs make use of the basic premise underlying the investment company concept: a fund pools investor assets and employs investment diversification with an objective of meeting or beating market returns. But ETFs also offer features that differentiate them from the most common type of Investment Company—The Mutual Fund.

Most ETFs attempt to achieve the same investment return as that of a particular market index, such as the Dow Jones Industrial Average, Standard & Poor’s 500 Index, or NASDAQ Composite index. To mirror the performance of a market index, an ETF invests either in all of the securities in the index or a representative sample of securities in the index.¹⁴ Depending on the fund manager’s strategy, ETFs also track a wide array of regions, sectors, commodities, bonds, futures, currencies and other assets.¹⁵

ETFs traditionally have been index funds, but in 2008 the U.S Securities and Exchange Commission began to authorize the creation of actively—managed ETFs.¹⁶ Unlike traditional ETFs, which are designed to track an index, actively managed ETFs permit the fund manager to buy and sell securities and derivatives according to a stated strategy, described in the prospectus. As a condition of operations, the portfolio or fund holdings are disclosed daily on the fund’s website. ¹⁷

ETFs are primarily traded on the American Stock Exchange, but some are also traded on the NYSE Arca, NYSE Alt Net, and NASDAQ. ¹⁸

HOW DO ETFs WORK?

ETFs originate with a fund sponsor, which chooses the ETFs target index, determines which securities will be included in the basket of securities, and decides how many ETF shares will be offered to investors.¹⁹ For example, a fund sponsor wants to create an ETF that tracks the S & P 500 Index. Because of the expense involved in acquiring the basket of securities that represent the securities listed on the S & P 500—which can run into the million of dollars the fund sponsor typically contacts an institutional investor to obtain and deposit with the fund the basket of securities. In turn, the ETF issues to the institutional investor a creation unit, which typically represents between 50,000 and 100,000 ETF shares. (Note that, unlike shares in a traditional mutual fund that are purchased with cash, ETF sponsors require its investors to deposit securities with the fund.²⁰

Each ETF share represents a stake in every company listed on the S & P 500 Index. The institutional investors that holds the creation unit (the creation unit holder) is then free to either keep the ETF shares or to sell all or part of them on the open market. ETF shares are listed on a number of stock exchanges (NYSE, NASDAQ, Amex, etc) where investors can purchase them through a broker dealer. Like other exchange listed securities, a retail investor who purchases an ETF can liquidate its investment by selling its ETF shares at the then—current price. By contrast, a creation unit is liquidated when an institutional investor returns to the ETF the specified number of shares in the creation unit; the institutional investor receives a basket of securities reflecting the current composition of the ETF. ²¹

The basket of securities deposited by the institutional investor with the fund sponsor has been predetermined by the sponsor to track a particular index. When changes are made to the index (a stock is added to or dropped from the index), the fund sponsor notifies the creation unit holders that changes need to be made to the basket of securities originally deposited with the fund to ensure that the basket continues to track the composition of the index.²²

HOW AN ETF COMES TO MARKET

Retail investors