Using ETFs for strategic
portfolio construction
Indexing
Benchmark indices may outperform majority of actively
managed funds
S&P CRISIL SPIVA indices versus Active Funds Scorecard, India, December
2011:
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Percentage of funds outperformed by the benchmark
Fund category Benchmark index 1 - year 3 - year 5 - year
Large Cap S&P CNX NIFTY 35.29 59.26 52.63
Diversified S&P CNX 500 46.26 45.83 57.83
ELSS S&P CNX 500 27.78 48.48 59.26
Source: S&P CRISIL SPIVA Scorecard, India, December 2011
Why you should consider index investing?
Index investors believe that markets work and that these price securities „efficiently‟
Investing in an index makes no attempt at forecasts, analysis and timing markets… the objective is to
earn the market rate of return
Index investors take exposure to segments of markets and also entire markets via indexes
Asset allocation can be logically practiced with indexes as relative to buying individual stocks
Actions of large numbers of active investors set stock prices & index investors benefit from this at a low
cost
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Too many professional investors chase too few stocks
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1 - Source: NSE
2 - http://www.sebi.gov.in/cms/sebi_data/attachdocs/1317814385576.pdf
3 - http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo129&mid=3.1.9
4 - http://www.sebi.gov.in/sebiweb/home/detail/4980/no/Registered-Stock-Brokers-in-equity-segment
5 - http://www.sebi.gov.in/sebiweb/home/detail/152/no/Registered-Portfolio-Managers
6 - http://www.sebi.gov.in/sebiweb/home/detail/4982/no/Registered-Foreign-Institutional-Investors
7 - http://www.sebi.gov.in/sebiweb/home/detail/4983/no/Registered-Sub-Accounts
Category Numbers
Mutual funds2 49
Life insurers3 24
Brokers (EQ)4 10,061
Portfolio managers5 247
FIIs6 1,750
FII‟s sub account7 6,056
Large numbers of professionals chase few
liquid stocks! OR
Is it a situation where too many people are
chasing very few stocks? Top 50 stocks
57.69%1
Top 100 stocks
69.90%1
Market Capitalization
Lower costs of Index funds
Lower management fees as the cost of
researching stocks, industries, sectors etc
is eliminated
Stocks in an index don‟t change often and
this leads to lower trading related costs
Lower portfolio turnover and higher liquidity
of index stocks incase of large cap indices
reduces market impact costs
Intangible costs – non-systemic stock
picking risks get eliminated
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Introduction to Exchange Traded Funds (ETFs)
6
7
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Mar-12
AUM* 1 1 2 5 8 18 40 74 105 142 212 310 417 574 797 711 1032 1311 1351 1537
No. of ETFs 1 1 2 19 19 29 30 92 202 280 282 336 453 732 1171 1590 1939 2459 3011 3169
0
400
800
1200
1600
2000
2400
2800
3200
0
200
400
600
800
1000
1200
1400
1600
No
. of E
TF
s
AU
M $
Bil
lio
n
Growth of International ETFs
Growth of International ETFs
•- AUM in USD Billion. Source: Blackrock ETF Landscape Q1 End 2012. This information discusses general market activity, industry or sector trends, or other broad-based economic,
market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.
Growth of ETFs in India
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Source : Based on data collated from AMFI website i.e. www.amfiindia.com
* - Average AUM for the Quarter. (For other periods amount is Average AUM for Month)
Dec - 02 Dec - 03 Dec - 04 Dec - 05 Dec - 06 Dec - 07 Dec - 08 Dec - 09 Dec - 10*
Dec - 11*
Mar - 12*
7 168 568 2920 7811 7142 2671 2410 4981 10852 11146
No of ETFs 1 5 6 6 6 12 16 18 26 33 34
0
5
10
15
20
25
30
35
40
0
2000
4000
6000
8000
10000
12000
Familiar ground – best of both worlds
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Like a stock…
Trading flexibility intraday on the exchange
Real time price
Put limit orders
Minimum trading lot is just 1 unit
Delivery into your Demat account
Like an index fund…
Constructed to track the Index
Open ended mutual fund
Low expense ratio
Low turnover
Transparent
ETF
Index fund Stocks
Mechanism
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Primary market
Buy / sell
Market making /
arbitrage
Fund
Authorized
participants /
financial
institutions
Subscription
/redemption
in-kind
Secondary market
Seller
Buyer
NSE
*GS BeES Cash
Cash *GS BeES
* GS BeES = Goldman Sachs Exchange Traded Funds
Asset Allocation – Elimination of Portfolio Concentration
Risks
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Challenges to stock picking
„News‟ can move stock prices and „news‟ is inherently unpredictable
All information an analyst can learn about a company from annual reports, marketing material etc… is
already built into the stock price…
Because thousands of other analysts have similar information sources
What is unknown is the knowledge that will move the stock… e.g. a news event which is impossible to
forecast
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The importance of eliminating concentration risk in your
portfolio
What is concentration risk?
A portfolio with a large portion of its assets invested in a single stock
A portfolio comprised of several stocks concentrated in one market sector, for e.g. healthcare
A portfolio consisting of a single asset class, for e.g. Europe large cap
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This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also refers to specific securities which pertains
to past performance or is the basis for previously made discretionary investment decisions. It should not be construed as research or investment advice, or recommendation to buy or sell
investments in the strategy or any other investments mentioned in this report or to follow any investment strategy. Please see additional disclosures. Diversification does not protect an
investor from market risk and does not ensure a profit.
The importance of eliminating concentration risk in your
portfolio (Contd.)
Why think about it?
Concentrating your portfolio in a particular stock, market sector or asset class can be risky. Markets are
cyclical: individual stocks, market sectors and asset classes perform differently over time, fluctuating in
value as economic conditions change.
Because no one can predict which will perform the most favorably at any given time, we believe it‟s
important to diversify stocks across a broad spectrum of sectors (e.g. healthcare, industrials, consumer
goods) and asset classes, for e.g. Europe and international equities, fixed income and real estate.
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This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also refers to specific securities which pertains
to past performance or is the basis for previously made discretionary investment decisions. It should not be construed as research or investment advice, or recommendation to buy or sell
investments in the strategy or any other investments mentioned in this report or to follow any investment strategy. Please see additional disclosures. Diversification does not protect an
investor from market risk and does not ensure a profit.
The importance of eliminating concentration risk in your
portfolio (Contd.)
How can it happen?
You may think you are invested in a well-diversified portfolio, but if it is not monitored carefully you may
find yourself with a concentrated position.
Concentration could occur as a result of a gift or inheritance of a restricted stock, employer stock options
or contributions to a retirement plan, or a booming market.
For example, the bull market of the 1990‟s led investors to concentrate their portfolios with single stock
positions in sectors such as technology and telecommunications.
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This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also refers to specific securities which pertains
to past performance or is the basis for previously made discretionary investment decisions. It should not be construed as research or investment advice, or recommendation to buy or sell
investments in the strategy or any other investments mentioned in this report or to follow any investment strategy. Please see additional disclosures. Diversification does not protect an
investor from market risk and does not ensure a profit.
The importance of eliminating concentration risk in your
portfolio (Contd.)
Single stock examples (For illustrative purpose only)
Those who invested solely in WorldCom (WCOM) or Enron (ENE) beginning January 1993 illustrate the
potentially negative effects that can result from concentrating a portfolio in a single stock:
A $10,000 WorldCom investment would have grown to $118,412 at the height of the stock‟s performance
in April 1999, versus $33,964 for an S&P 500 investor
A $10,000 Enron investment would have grown to $75,579 at the height of the stock‟s performance in
October 2000, while a more diversified S&P 500 investor would have held $33,964
But without having the benefit of a crystal ball, many investors decided to stay invested in Enron and
WorldCom well after they started to decline. Unfortunately, over a year later in 2001, Enron and WorldCom
both began a downward slide, and eventually left investors with a fraction of their original holdings.
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This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also refers to specific securities which pertains
to past performance or is the basis for previously made discretionary investment decisions. It should not be construed as research or investment advice, or recommendation to buy or sell
investments in the strategy or any other investments mentioned in this report or to follow any investment strategy. Please see additional disclosures. Diversification does not protect an
investor from market risk and does not ensure a profit.
The importance of eliminating concentration risk in your
portfolio (Contd.)
$10,000 Hypothetical Investment (1/93 – 9/02): Enron, WorldCom and the S&P 500?
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Source: Yahoo. Enron and WorldCom examples above are for illustrative purposes only and do not represent any investment held in a Goldman Sachs Fund.
Source for all slides with the heading „The importance of eliminating concentration risk in your portfolio‟:
Goldman Sachs Asset Management - Advisor Series “The importance of eliminating concentration risk in your portfolios”
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also refers to specific securities which pertains
to past performance or is the basis for previously made discretionary investment decisions. It should not be construed as research or investment advice, or recommendation to buy or sell
investments in the strategy or any other investments mentioned in this report or to follow any investment strategy. Please see additional disclosures. Diversification does not protect an
investor from market risk and does not ensure a profit.
Benchmark Indexes
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Indices – facts
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Index Full Market Cap. (Rs. Crs.) P/E P/B Dividend Yield (%)
S&P CNX Nifty 3516862.6 18.71 3.01 1.5
CNX Nifty Junior 744302.88 15.87 2.33 1.48
CNX Bank Index 584358.96 15.25 2.32 1.31
CNX PSU Bank Index 292264.34 9.05 1.51 2.21
S&P CNX Nifty Shariah Index 2132671.48 17.95 3.47 1.66
CNX Infrastructure Index 761184.89 18.58 2.16 1.15
Source: www.nseindia.com
Index Full Market Cap. (Rs. Crs.) P/E Dividend Yield (%)
Hang Seng Index 7631565.52 10.51 3.46
Source: Hang Seng Indexes Company Limited
P/E – Price to Earning ratio
P/B – Price to Book ratio
Data as on 30th Mar 2012
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or
solicitation to buy or sell securities.
THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY
PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.
Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy,
completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness
of all information available from public sources.
The views and opinions expressed are those of the speaker, for informational purposes only and do not constitute any
investment advice or recommendation by Goldman Sachs. We have relied upon and assumed (without independent
verification) the accuracy and completeness of such information and neither agree nor disagree with the content herein.
This material is issued in or from India by Goldman Sachs Asset Management (India) Private Limited (GSAM India)
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© 2012 Goldman Sachs. All rights reserved.
75398.OSF.OTU
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Disclosures