ETFs, short for Exchange Traded Funds are traded on the stock market funds. ETFs have no maturity limit and can therefore be permanently traded like shares at the current market price. When buying a fund unit, the investor becomes a shareholder of the components contained in the Funds.
The index can be of a country, an industry, or even a global index. Therefore the investor participates identically in rising and falling markets according to the development of the ETF underlying index.
Unlike actively managed funds Exchange Traded Funds are mainly passively managed. An underlying index should be reproduced as exactly as possible.
ETFs combine the advantages of three asset classes: equities, certificates and funds. Like shares, ETFs can also be traded at the current market value at any time.
This Report compares and contrasts the two Exchange traded funds iShares MSCI Taiwan ETF and First Trust Taiwan AlphaDEX. It will discuss a number of key figures and will stress the strengths and weaknesses of each fund. The following key figures for the two funds are based on self-‐made calculation using Excel and data form Datastream. If any figures are used, which have another source, it will be clearly cited. The time period for all key figures is two years, expect for the Pricing efficiency, which has been calculated for one year. All estimated returns are log returns due to the reason they have the property that they can be interpreted as continuously compounded returns and are addable.
Table of Contents
1. Introduction
2. Overview of the Funds
2.1. Description – iShares MSCI Taiwan ETF
2.2. Description - First Trust Taiwan AlphaDEX
3. Risk/Return Profile
3.1. Sharpe Ratio
3.2. Beta
3.3. Standard Deviation
4. Tracking Efficiency
4.1. Tracking Error
4.2. Beta and R²
5. Pricing Efficiency
6. Liquidity
7. Conclusion
Objectives and Topics
This report aims to evaluate and compare the performance, risk profiles, and efficiency of two specific Exchange Traded Funds (ETFs) operating within the Taiwanese market: the iShares MSCI Taiwan ETF and the First Trust Taiwan AlphaDEX.
- Comparative analysis of fund performance and key financial figures.
- Evaluation of risk-adjusted returns using Sharpe Ratio and Beta metrics.
- Assessment of tracking efficiency and the replication strategies employed.
- Investigation into pricing efficiency and market liquidity variations.
Excerpt from the Book
2.1. Description – iShares MSCI Taiwan ETF
The iShares MSCI Taiwan Exchange Traded Fund (EWT) was launched on 20.06.2000. The ETF seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the Taiwanese market, as measured by the MSCI Taiwan Index (the Index). The Index seeks to measure the performance of the Taiwan equity market. Companies are included in the benchmark index weighted by market capitalization on free float-adjusted basis. Free float-adjusted means that in the calculation of the benchmark index only uses shares, which are available to foreign investors and not all issued shares of a company (101 Companies in total). The market capitalization of the free float adjusted basis is the product of the share price of a company and the number of shares that foreign investors are available. The index aims to capture 85% of the (publicly available) total market capitalization.
The EWT directly invests in securities of the Index. The current (21.11.2014) number of holdings is 108, total net assets are $3,292,548,343 and shares outstanding are 210,000.000. The EWT is traded at the New York Stock Exchange (NYSE) and follows a complete replication strategy. Dividends are paid semi-annually and the base currency of the Fund is US dollar. Only authorized participants (e.g. select financial institutions) purchase and redeem shares directly from the fund. Other investors can buy or sell shares daily through an intermediary on an exchange where the shares are traded. As the EWT is investing in an emerging country, investors face certain risk factors that are specific for emerging markets. Emerging markets are generally more sensitive to economic and political conditions than developed economies.
Summary of Chapters
1. Introduction: Outlines the basic function of ETFs and the scope of this comparative report between two specific Taiwan-focused funds.
2. Overview of the Funds: Provides detailed descriptive profiles of the iShares MSCI Taiwan ETF and the First Trust Taiwan AlphaDEX, highlighting their different selection methods and fund objectives.
3. Risk/Return Profile: Analyzes the risk characteristics of both funds using Sharpe Ratio, Beta, and Standard Deviation to determine performance relative to their respective benchmarks.
4. Tracking Efficiency: Examines how closely each ETF replicates its underlying index, specifically through Tracking Error analysis and correlation metrics (Beta and R²).
5. Pricing Efficiency: Compares the trading price of the ETFs against their Net Asset Value (NAV) to assess how effectively they trade at fair market value.
6. Liquidity: Investigates the marketability of the two funds by analyzing bid-ask spreads and turnover volumes.
7. Conclusion: Summarizes the key findings, noting that while both funds share similar goals, the EWT exhibits higher liquidity and a more complete market replication compared to the FTW.
Keywords
Exchange Traded Funds, ETFs, iShares MSCI Taiwan, First Trust Taiwan AlphaDEX, Sharpe Ratio, Beta, Tracking Error, Pricing Efficiency, Liquidity, Bid-Ask Spread, Market Capitalization, Emerging Markets, Financial Performance, Replication Strategy, Portfolio Diversification.
Frequently Asked Questions
What is the primary focus of this report?
This report provides a comparative analysis of the iShares MSCI Taiwan ETF and the First Trust Taiwan AlphaDEX regarding their risk, performance, and efficiency.
What are the main thematic areas covered?
The study centers on three core pillars: risk-return profiles, tracking efficiency against benchmarks, and liquidity/pricing efficiency.
What is the central research objective?
The objective is to contrast the strengths and weaknesses of the two funds to determine how effectively they fulfill their investment mandates in the Taiwanese market.
What scientific methods are applied?
The author uses quantitative financial analysis, including the calculation of Sharpe Ratios, Beta, Standard Deviation, tracking errors, and bid-ask spreads based on Datastream and Excel data.
What does the main body explore?
The main body breaks down the funds' structural descriptions, calculates various statistical metrics for risk and tracking, and evaluates market performance indicators like liquidity and pricing accuracy.
Which keywords define this work?
Key terms include ETFs, Tracking Efficiency, Sharpe Ratio, Market Liquidity, and Emerging Markets.
How does the replication strategy differ between the two funds?
The EWT follows a complete replication strategy with 108 holdings, while the FTW uses a more selective, midcap-biased approach with only 40 holdings.
Which fund demonstrates higher market liquidity?
The iShares MSCI Taiwan ETF (EWT) is found to be significantly more liquid, evidenced by a lower average bid-ask spread and much higher average daily turnover compared to the FTW.
- Quote paper
- Arthur Ritter (Author), 2014, Comparison of Exchange Traded Funds. iShares MSCI Taiwan ETF and First Trust Taiwan AlphaDEX, Munich, GRIN Verlag, https://www.grin.com/document/289141
