Relevance of Exchange Traded Funds for Conservative Investors to Achieve Real Capital Preservation During Policy of Low Interest Rates

Bachelor Thesis, 2015

64 Pages, Grade: 2,0






1.1 Problem Description
1.2 Objectives
1.3 Scope of Work

2.1 Monetary Policy Measures of European Central Bank
2.2 Coherence of Inflation, Deflation and Money Investment
2.3 Deduction for Investment Decisions

3.1 Investment Principles
3.1.1 Mindset Towards Safety and Risk
3.1.2 Investment Objective
3.1.3 Time Horizon
3.1.4 Pricing
3.1.5 Choice of Investments
3.2 Distinction From Balanced Investors
3.3 Distinction From Aggressive Investors

4.1 History and Development
4.2 Definition and Characteristics
4.3 Differentiation from Mutual Funds
4.3.1 Management Technique
4.3.2 Stock Exchange Trading
4.3.3 Cost Structure
4.3.4 T ransparency
4.4 Index Tracking Techniques
4.4.1 Full Physical Replication
4.4.2 Partial Physical Replication
4.4.3 Swap-Based Synthetic Replication
4.5 ETF Types
4.5.1 Bond ETF
4.5.2 Money Market ETF
4.5.3 Commodity ETF

5.1 Change of Investment Mindset
5.2 Performance Analysis
5.2.1 Interest Development of Savings Accounts in Germany
5.2.2 Performance of ETFs Tracking the German Stock Market
5.2.3 Evaluation of Performance Results
5.3 Pricing Analysis
5.4 Generic Investment Chances
5.4.1 Diversification with Reasonable Pricing
5.4.2 High Liquidity Through Trading Flexibility
5.4.3 Investment Transparency
5.5 Generic Investment Risks
5.5.1 Volatility in Underlying Indexes
5.5.2 Inflexible Fund Holdings
5.5.3 The Right Choice

6.1 Determination of Investment Type and Risk Disposition
6.1.1 Lump Sum
6.1.2 Savings Plan
6.2 Definition of Investment Time Horizon
6.3 Tracking of Underlying Index
6.4 Choice of ETF Investment Company
6.5 Identifying Cost-Efficient ETFs

7.1 Target Achievement
7.2 Prospects



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Figure 1: Deflationary Spiral

Figure 2: Investment Diversification Through Several Asset Investments

Figure 3: Active Management Procedure

Figure 4: Index Agreement on Swap-Based Synthetic Replication

Figure 5: Commodity Basket of the DBLCI

Figure 6: Average Interest Rate Development On German Savings Accounts

Figure 7: DAX 30 Historical Index Development

Figure 8: Key Criteria of the ETF Investment Decision

Figure 9: Lump Sum Investment Allocation

Figure 10: Worksheet Revenue And Expenditure Account

Figure 11: Time Outbalances Price Fluctuations


Table 1: Investor Types and Characteristics

Table 2: Comparison Between ETFs and Mutual Funds

Table 3: Determinants of Trade Flexibility and Liquidity

Table 4: ETF Providers


1.1 Problem Description

The world of money investment offers various possibilities for all kinds of investor to achieve personal financial goals. Institutional investors, such as hedge funds, insurances and asset managers, pursuit maximum profit for satisfaction of client expectations. In contrast, private investors concentrate on personal goals, for instance, retirement arrangements, inheritance or material wishes. Nearly €4.5 trillion are the total savings of German private households[1]. From classic savings accounts up to capital investments in stock or bond market, investors are spoilt for choice. However, recent global financial events lead to the necessity of rethinking prevailing investment choices. Especially conservative investors with emphasis on low-risk investments suffer from the present investment landscape marked by low interest rates. They prefer investments in bank deposit accounts and avoid possible alternatives[2]. 25% of all German private investors follow that idea of full security[3]. But the recent ECB statement from April 2015 underlines the continuation of the policy of low interest rates. Due to the American model, key interest rate remains low at 0.05%[4] In addition, monthly purchase programmes of public and private securities in the amount of €60 billion are executed. Hence, seeking new investment alternatives are the conclusion for savers. By way of example, dividends can be the new interests for conservative investors. The utilization of investment chances on the stock market can be a profitable solution for real return achievement and at last capital preservation. Despite the existing investment risk, it offers manifold ways to achieve winnings[5]. On account of this, conservative investors need elaboration for approaching the stock market as effectively as possible to keep the risks and potential losses marginal. Discovering the personal most suitable investment strategy with the according mindset determines the success rate. This also implies to know the own willingness for taking risks[6]. According to stock market expert André Kostolany, it is important to not allow emotions affect rational investment decisions[7].

1.2 Objectives

The challenge that conservative investors encounter is to find investments which enable possibilities for capital preservation with risks as low as possible. Due to inflation and a respective decrease of purchasing power, interest rates on investments have to be adjusted and therefore needs to be higher[8]. Entering the capital market means to pursue adequate returns[9]. But participating in the stock market to reach for real returns implicates a certain level of risk in this undertaking. However, long-term stock investments are verified in regards of preserving capital after taking inflation rate into account[10]. Thus, the financial transition from classic deposit accounts to deliberate stock investments needs to be thoroughly managed in terms of key criteria such as investment type, risk disposition and investment target. The objective is the implementation and evaluation of exchange traded funds as investment alternative for conservative investors.

1.3 Scope of Work

The paper starts with the illustration of the recent financial investment landscape by providing information concerning present interest developments in the Euro area. This constitutes the foundation for comprehending the difficult investment situation. Subsequently, the phenomenon of inflation and deflation is explicated in respect of investment recommendations. On these grounds, principles of conservative investing are introduced in order to distinguish from other investor types. Since capital markets offer chances, conservative investors need to dismiss classic investments with almost zero interest rates. Otherwise, investors run risk of being victims of the government’s initiated financial repression. Gradual reduction of government debts by keeping inflation rate above interest rates is the typical result[11]. Thereafter, ETF’s are presented referring to definition and functionality. The depiction of differences between ETF’s and classic mutual funds assists the investor in understanding this investment type and formulating a strategy. In addition to it, ETF’s are analyzed in terms of chances respectively risks with an evaluation focusing on the emphasis for conservative investors. The evaluation verifies the applicability, thereby concentrating on the principles of conservative investing to give a final conclusion and outlook for ETF’s.


2.1 Monetary Policy Measures of European Central Bank

Since 1999 the European Central Bank is accountable for the monetary policy within the EMU[12]. This task encompasses - due to the Maastricht Treaty - the objective of maintaining price stability[13]. It is the essential requirement for a well­functioning market economy, thereby leading to sustainable economic growth. Price stability is based on the Harmonised Index of Consumer Prices which is a characteristic number to determine price level development by using a basket of goods and services[14]. By keeping inflation rate close to 2%, the objective of price stability is accomplished. Hence, the ECB can employ specific instruments to enforce this objective. For instance, conducting changes in the key interest rate for steering the money supply conduce to success. The key interest rate determines bank lending rates and therefore the cost of credit for borrowers. On the one hand, the consequences for investors are low interest rates on investments such as savings accounts. On the other hand, the conditions for credit financings are beneficial. By enabling reasonable borrowings and thereby increasing consumption, the economy experience stimulation. Since September 2014 the interest rate on the main refinancing operations of the Eurosystem amounts 0.05% and still remains unchanged due to the latest ECB press conference. Those regularly statements serve as effective communication medium to convey recent decisions and future developments[15]. In addition to the proclamation of the key interest rate, the ECB holds the instrument of open market operations. They serve a liqudity-providing function for commercial banks and can be distinguished by their duration between main refinancing operations and long term refinancing operations. This provision of money occurs by exhibiting collaterals[16]. The involved transactions directly influence the money supply in an economy. Immediate effects can also be achieved by the offering of standing facilities which are provided in two ways: (1) marginal lending facility and (2) deposit facility. On basis of the (1) marginal lending facility, commercial banks are enabled collaterized short-term lendings for compensation of liquidity requirements. This also serves as a cap for interest rates on deposit accounts because of the influence on lending operations among the banks. A bank provided with appropriate collaterals would not accept lendings from another bank, if the interest rate is inferior to the conditions of the ECB. The rate for the marginal lending facility amounts 0.30% since September 2014 and still remains untouched until today. Moreover, there is the rate on the (2) deposit facility with the current state of -0.20%. If banks deposit their residual money until the next business day, they are obliged to pay -0.20% on the amount. The motive for implementing a negative interest is the enforcement to spend the remaining money for lendings to private and institutional credit users. This also serves the purpose of providing a minimum level of interest rate on deposit accounts because it influences the credit behavior among bank institutes. No bank would accept a lower interest rate than the interest rate offered by depositing the money without any risks at the ECB. Further on, another ECB instrument takes place in shape of the minimum reserves. A Bank institution is obliged to hold a minimum amount of money at the national central bank1'. The minimum reserve is calculated individually due to a credit institution’s balance sheet. Reasons for this requirement are the creation of reserves for unexpected events and the supervision of a bank’s credit operations[17] [18]. Changes in the minimum reserve rate determine the quantity of money[19]. However, the totality of these conventional instruments is still not effective enough[20]. Hence, the conduction of the expanded asset purchase programme reinforces the achievement of the objective. This approach is also called quantitative easing (QE) and states an extended form of the given open- market operations[21]. QE contains, besides the private sector assets, the purchase programme for public sector securities. A monthly purchase programme of €60 billion is recently stated. This is justified by the primary objective to ensure price stability which means maintaining inflation rates below, but close to 2%. This programme is intended to run until September 2016 and until the Governing Council sees the aspired inflation changes. Overall, as long as governments still incur debts, nominal interest rates remain low[22].

2.2 Coherence of Inflation, Deflation and Money Investment

The current inflation rate in Europe amounts 0.0% in April 2015[23] According to the primary objective of maintaining price stability, the ECB justifies the utilization of the performed instruments in order to achieve inflation rate close to 2%. This depicts a vital procedure to avoid consequences of deflation. By way of example, Japan and its people suffer for years from economic impacts of deflation[24]. Typical symptoms appear in the shape of low prices for goods and services. Companies are forced to lower their prices to ensure sales and to stay competitive. This circumstance occurs, when the supply of goods and services exceeds the demand on the market. Deflation thus is commonly described as the receding of the price level[25]. On the one side, consumers tend to move their purchases into the future in hope of lower prices to receive more goods and services for the money spent[26] [27]. On the other side, companies struggle with declining sales and hence adjust the production to the demand. As a consequence, the rise in unemployment rate and fall of available income threatens the economic stability. A deflationary spiral emerges because business investments decline to economic disadvantage.

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Figure 1: Deflationary Spiral

2.3 Deduction for Investment Decisions

Due to the current financial environment, security needs to be redefined. A supposing secure investment in deposit accounts contains the risk of real capital losses. Since inflation rate exceeds the yield, investors are harmed by negative interests[28]. Hence, today’s interpretation of security means to gain capital preservation in real terms. But at the present time, this objective seems to be difficult to achieve. Even institutional investors such as life insurances are in seek of lucrative secure investments to ensure guaranteed benefits[29]. Those guarantees result from endowment policies in the past and pose a financial burden for the present business. Also bank institutions are affected by lower interests with regards of their classic investment possibilities[30]. According to the mentioned ECB instruments and purchasing programmes, a change in near future in the key interest rate is not in sight. These measures, in fact, are an indication for purposeful continuity of the policy of low interests. Thus, conservative investors need to change previous investment behaviours by investigating alternatives with profitability. Investment chances lie in the so-called capital markets which consist of the bond and stock market. Participants in this market can perform long-term refinancing by issuing securities[31]. Those securities, such as bonds and shares, can be purchased and sold by investors. Hence, investors herein discover a great number of investment opportunities by participating in the capital markets. Stock markets are known for their investment chances. A stock represents a fraction of a company and can be bought on stock markets[32]. The purchases are performed on stock exchanges. Common stock exchanges are for example the New York Stock Exchange and the London Stock Exchange. Buying for a specific price in expectation of selling for a higher price illustrates one of many strategies behind stock investments. This decision means taking inevitable risks[33]. However, investors can become aware of risks and control them to a certain degree. For example, by investing available money in several stocks, risk can be allocated through diversification[34]. If one stock does not perform well, other stocks can compensate the loss and avoid worse. Picking single or several stocks requires general know-how in entrepreneurship and as a consequence thereof economic correlations. Hence, risk is defined by Warren Buffett as a lack of stock market knowledge[35] [36].

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Figure 2: Investment Diversification Through Several Asset Investments 36


3.1 Investment Principles

Every investor follows specific investment objectives and therefore requires a guideline for achievement. A clear objective in mind avoids losing the motivation of dealing with investments[37]. This guideline determines the line of actions and the depiction of the investor’s mindset. However, behavioral finance proves that investors do not always act rationally and follow their actual procedures[38]. Concerning conservative investors, they prefer guiding their money through safe waters with consistency and convincement. That is because the general desire of keeping the money is dominating[39].

3.1.1 Mindset Towards Safety and Risk

The term of safety can be dependent on several criteria and hence leads to various interpretations such as the complete loss of capital[40]. The bias of conservative investors is the risk-averse investment focus on pursuing financial security and capital preservation[41]. This approach contains prioritization on protection of nominal capitals. Therefore, the definition respectively understanding of financial security is to see the capital stable. Secure investments serve the purpose of showing no volatility in respect of capital value. The invested capital shall show gradual progression in performance. Even if the progression is marginal, conservative investors appreciate the outcome. In their opinion, risk is equitable with the danger of losing money beyond the invested amount. It also implies the uncertainty of investment returns. Conservative investors thus rather consider themselves satisfied with low-interest. The affinity for safety arises from their emotionality in regards of financial matters[42]. Therefore, when it comes to investment decisions, taking risks for possibly higher returns and the desire for safety at lower interests are in conflict. Hence, trying to approach for profits should not be carried out with emotional behavior patterns[43]. Emotionality can prohibit one from understanding factual data which can be important in taking the right decisions for succesful investments. Due to that fact, secure-minded investors avoid risky undertakings because the feeling of losing money is more memorable than the feeling of earning high returns. According to conservative investors, safety is always given preference and risks are not to be taken into investment considerations.

3.1.2 Investment Objective

Pursuing an individual investment objective is essential for succeeding. Investors with no specific imaginations are ineffectual in their implementations[44]. That requires appropriate investment decisions. Considering personal and financial criteria are vital for the right decisions[45]. In the case of conservative investors, the objective is set to be accomplished in any event. By avoiding any kinds of risk, the investment return is predetermined. A popular conservative investor’s objective hence is the retirement arrangement. The policy of low interests affects the insurance’s investment profitability and as a consequence reduces the profit sharings for investors[46]. Nevertheless, investors can rely on a guaranteed yield to manage the retirement. Due to the certainty of guaranteed returns, the determination of a desired pension is enabled. By deciding for secure investments with guaranteed low-interests, the interest yield can be foreseen. Another investment objective is the intention of enabling purchases in the future. For example, the goal is to buy a new car in five years. The personal financial situation states no available funds. Therefore, by saving a fixed monthly amount, the required purchase amount can be gradually achieved. In this case, the interest yield is secondary because the investor pursues the target of raising the needed money in the given time horizon. Both examples illustrate that security of the invested money is essential and must not lose in value. The financial return on investment hence plays a subordinate role for conservative investors.

3.1.3 Time Horizon

The time horizon determines the duration of an investment[47]. It is the temporal frame for the objective[48]. Concerning the duration, determinants on this are the individual investor type and his personal objectives. The conservative investor specializes neither on short-term nor long-term investments. He rather makes the decision on basis of the current financial situation. Long-term investments are chosen when an investor wishes to build up accrued reserves by gradual savings. On the other hand, if a specific sum of money already exists for the purpose of an upcoming purchase, short-term investments enjoy first choice to bridge the time. Avoiding lost profits is often achieved by choosing short-term investments with daily availability. In any event, the objective is superior to the time horizon.

3.1.4 Pricing

The fees for an investment are an important factor because costs are detrimental to the rate of return. An investment must ensure capital preservation[49]. This objective is achieved more efficiently with low investment fees. The pricing generally contains two components: (1) a one-time charge and (2) administration charges. In case of the (1) one-time charge, the investment includes a specific initial fee in the amount of a fixed percentage. This charge reduces the invested amount at the investment beginning and thus retards the performance. In addition, (2) administration fees serve the purpose of financing the regular investment efforts. The fees are applied against the yields and ultimately reduce the overall performance[50]. Hence, there is a rising tendency among the investors towards low-fee-investments such as ETPs[51]. Conservative investors are cost-sensitive when it comes to investing money. This is due to the fact that the purposeful decision on conservative investments does not involve high profits. High investment expenses lead to lower tolerance concerning risks[52]. The conclusion for conservative investors is to keep the investment costs marginal with the result that low-interest investments still remain lucrative.

3.1.5 Choice of Investments

Approaching the right investment requires the consideration of key criteria such as risk disposition, investment objective, time horizon and pricing. Hence, the investment must align with life and its inherent plans[53]. On these grounds, conservative investors prioritize bank deposit accounts. If an investor does not tolerate risk and is not willing to accept moderate returns, then he inevitably meets savings accounts[54]. This type of investment contains protection respectively deposit insurance and thus secures the amount invested[55]. They fulfill the requirement of availability and thus are suitable for short-term investments. The daily availability of that money does not allow credit institutions to take advantage of that money in the long term. This makes the interest rate variable and commonly low. Furthermore, it can be adjusted to the prevalent interest rate level in a daily basis. Moreover, it is also possible to agree on a set period of time. This includes a fixed interest rate which is paid at the end of the duration. In return, the invested money is not available and thus enables credit institutions long-term investments.

3.2 Distinction From Balanced Investors

Whereas the conservative investor avoids any kinds of risk, the balanced investor partially takes risk with consciousness[56]. Fine self-control in his investment behaviour is required to protect his total assets[57]. His major objective is to make profits after preserving his capital at the end of the day. Therefore, he does not rely on bank deposit accounts alone, but rather seeks investments in the capital markets. In the course of approaching the capital markets, the balanced investor invests only parts of his total assets. These parts do not pose a threat to his financial situation because losses can be tolerated in respect of factual and emotional aspects. The majority of assets are invested in conservative investments such as savings accounts and term deposits thereby ensuring the capital base. By approaching the capital markets, the investments can be planned in the long-term. This due to the fact, that the investments can underlay fluctuations leading to changes of the investment value at any time. Hence, risky investments need time to recover from the volatility on markets and can be balanced over time.

3.3 Distinction From Aggressive Investors

The aggressive investor’s objective is investing money to make maximum profits. He consciously takes high investment risk to make his set goal of attaining maximum increase in capital possible[58]. The level of risk tolerance is dependent on the investor’s wealth[59]. Hence, aggressive investors are commonly wealthy and can endure losses. This is due to the fact, that the money invested is not needed and serves the purpose of profit maximization. Conservative investments respectively strategies do not play parts in his procedures. Banking deposit accounts or low- yield bonds do not exist in the investment considerations. The emphasis is rather on short-term strategies thereby avoiding bonding in long-term investments in order to make fast profits. This undertaking includes the tolerance for investment fees when performing a high number of capital transactions. For instance, day-trading depicts a strategy to purchase and sell stocks in short time intervals[60]. The time between purchase and selling can be within days, hours or minutes. On these grounds, the aggressive investor uses most parts of his assets to approach the capital markets for winnings. He possesses profound knowledge and education in order to elaborate investment procedures[61].

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Table 1: Investor Types and Characteristics [62]


4.1 History and Development

The foundation history and principles of ETFs are based on two important financial pillars: (1) the Modern Portfolio Theory (MPT) and (2) the Efficient Market Hypothesis (EMH). (1) MPT rests on empirical evidence of the American economist Harry M. Markowitz in the year 1952[63] The theory proves that the strategy of diversification is essential in every portfolio. Diversification means to spread the investment risk by choosing several investments. As a consequence, losses of one investment can be absorbed by another investment’s earnings and lead to stabilization of the portfolio. Hence, diversification is a key criterion for the measurement of performance[64]. According to Markowitz, there is a conflict of objectives between expected returns and the inherent risk. By diversifying the portfolio, single risks of each investment can be neutralized[65]. So the single risks do not add up to the investor’s disadvantage. Another important pillar of ETFs is (2) the Efficient Market Hypothesis. EMH is based on the American economist Eugene Fama in the mid-1960s[66]. The hypothesis implies that the price of a security contains all relevant information regarding the investment[67]. Consequently, there is no market participant with an information advantage to gain higher profits for his investments. The none-existing information asymmetry constitutes an efficient market. In an efficient market, investment capital is allocated in a way that it has the most productive use. Market efficiency also states the impossibility for investors to surpass the market performance. The theory says that there are no mispriced securities available on the market to exploit and take advantage of. Hence, the active management of an investment has no benefits in comparison to passive or index-based investments. Summarizing the MPT and the EMH, a successful investment follows the strategy of diversification and active management is not superior to passive or index-based investments. Since the 1970s, both principles constitute the idea of trading an entire portfolio as a basket[68]. Portfolio trading enables the investment in several another investments with one amount invested. Investors are able to spread the risk and enhance the chance for profits. Thus, diversification can be achieved without providing large investment amounts. Buying a single ETF share implies the automatic financial participation in all inherent underlying stocks. This enables investment possibilities not only for institutional but also private investors. The first ETF available for private investors exists since 1976 and is premised on the idea of John C. Bogle and Burton Malkiel to replicate the performance of the Standard & Poors 500 Index[69]. The Standard & Poors 500 Index is an American stock market index and contains the 500 biggest companies due to their market capitalizations. Subsequent to the first implementation, ETF investments still emerge with popularity among private and institutional investors until today. Even during the financial crisis in 2008, ETFs worldwide experienced a net cash inflow of $187,5 billion[70]. The first German ETF provider is today known as the investment company Indexchange who maintains the ETF iShares DAX® since December 2000[71].

4.2 Definition and Characteristics

An Exchange Traded Fund is a special type of mutual fund[72]. It can be traded on stock markets and has an unlimited duration. It pools the assets to accomplish the investment strategy of replicating a benchmark such as the Standard & Poor’s 500 stock index. The objective is to pursue the market performance[73]. ETFs can track many market benchmarks such as indices, currencies or commodities[74]. Hence, ETFs are managed passively and do not contain active management. Due to that fact, the investment efforts are low and can be passed on in the form of marginal costs. Unlike mutual funds, there is no subscription fee for the purchase on the stock exchange. The overall charge is commonly low in comparison to mutual funds with the result that investors do not have costs in advance. Moreover, ETFs can be traded steadily during the regular opening hours of the stock exchange. The purchase and selling can be performed to current market prices. Thus, it provides investors a high degree of liquidity. ETFs are also characteristic for their transparent price formation because the performance is based on the underlying index. In addition, ETFs offer the information of an intraday net asset value (iNAV). The iNAV enables investors the possibility to make performance comparisons between ETFs. Furthermore, investors benefit from the fact, that all invested fund capital is legally treated as special assets. If an investment company declares insolvency, special assets are not taken into the insolvency estate and thus enjoy insolvency protection.

4.3 Differentiation from Mutual Funds

ETFs constitute a special form of mutual funds. The objective is to track the performance of an underlying index at the best possible rate after fund costs[75]. ETFs and mutual funds pursue different aims with different techniques to satisfy the investor’s return expectations. The difference of key investment criteria makes it necessary to regard both investments independent from each other. Statistics prove that the performance of mutual funds is superior to the returns of indexed funds[76] Hence, investors need evaluation on the applicability for both types of funds to ensure adequate profits.

4.3.1 Management Technique

Mutual Funds are commonly dependent on the active management of fund managers. Fund managers build and maintain a portfolio grounded on their own deliberate decisions. This implicates the autonomous pick of investments with the inherent purchase and selling transactions[77]. The selection of securities is based on research and judgement on company fundamentals, economic trends or cycles for specific industries. Fund managers are supported by investment research teams who are responsible for analyzing and processing those data. Those teams have access to research in different markets, sectors and establish contact to chief executive officers (CEO) of big companies. Analyzing valuable information from sources - such as from a CEO interview - for evaluation is their primary objective. The plurality of active management endeavours serves the purpose of outperforming a particular market index or strategy. Hence, the objective of active management is to deliver superior returns in comparison to the market. On the contrary, passive management is characterized by the objective of tracking an index respectively basket of companies in terms of return and risk character'[78]. In this case, passive fund managers do not perform purchases and sellings due to their own judgement. The investment decisions and transactions are based on the underlying index. They attempt to achieve an exact replication of the index and its inherent stocks in order to gain the equivalent returns. Thereby, the tracking error (TE) serves as a key figure for investors. TE describes the spread between the absolute return of an ETF and its index[79]. However, a spread does always exist because of administration fees within the ETF. Consequently, TE is also an indication for the appraisal of costs when yield spreads are not given[80].

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Figure 3: Active Management Procedure[81]

4.3.2 Stock Exchange Trading

ETFs are traded similarly to the purchase and selling of stocks. They are traded directly on the stock market and do not involve the transaction based on the investment company[82]. The trade is steadily offered throughout the exchange opening hour. During that trading time, the theoretical fair value of an ETF share is determined and published[83]. On this basis, the determination and publication of the iNAV - performed by the exchange or an assigned contractor - takes place every minute. This initially happens by reference to a computer system that calculates the fund assets due to the single investment positions within the portfolio. Subsequently, the fund assets are divided with the existing ETF shares in order to gain the iNAV. In addition to the constant trade, there are market makers who are obliged to set market prices throughout the trading time. They are assigned by the issued investment company to ensure the liquidity on market[84]. Market makers are in possession of ETF shares for intervention and securing of ongoing trade events[85]. If investors intend to perform intraday transactions, they can use the iNAV as reference point for trading opportunities. On the contrary, mutual fund shares are bought directly from the issued investment company to the public offering price (POP)[86]. POP hence is the price for purchasing shares. If an investor intends to sell respective redeem shares, this procedure takes place to the net asset value (NAV) per share[87]. The fund’s POP can never be lower than the NAV. However, the POP can be equal to the NAV. The information providing the NAV does take one time at the end of each trading day. Throughout the whole trading time, investors of mutual funds have to refer to this one-time stated value for considering redemptions and at last trading opportunities.


[1] Cf. Bretzinger, O. N. (2010), p. 11.

[2] Cf. Starchild, A. (2000), p. 15.

[3] Cf. Schwanfelder, W. (2007), p. 70.

[4] Cf. Sauren, E. (2015), p. 15.

[5] Cf. Furgang, K. (2011), p. 5.

[6] Cf. lonescu, G. H., Vilag, R., Vasile, I., Toader, S. (2009), p. 140.

[7] Cf. Konecny, L. (2013), p. 137.

[8] Cf. Scott, D. L. (2003), p. 187.

[9] Cf. Schwanfelder W. (2007), p. 70.

[10] Cf. Mayo, H. (2011), p. 304.

[11] Cf. Giovannini, A., de Melo, M. (1990), p. 8.

[12] Cf. Oldani, C. (2012), p. 15.

[13] Cf. de Haan, J., Berger, H. (2010), p. 4.

[14] Cf. Astin, J. (1999), p. 124.

[15] Cf. Schmidt, S., Nautz, D. (2012), p. 323.

[16] Cf. Jessop, B., Young, B., Scherrer, C. (2015), p. 303.

[17] Cf. de Haan, J., Eijffinger, S., Waller, S. (2005), p. 16.

[18] Cf. Gebauer, W. (1993), p. 37.

[19] Cf. Brownlee, O. (1968), p. 786.

[20] Cf. Joyce, M., Miles, D., Scott, A., Vayanos, D. (2012), p. 272.

[21] Cf. Sinclair, P., Ellis, C. (2012), p. 840.

[22] Cf. Reinhart, C. M., Kirkegaard, J. F., Sbrancia, M. B. (2011), p. 22.

[23] Cf. European Central Bank (2015), w/o p.

[24] Cf. Koll, J. (2008), p. 46.

[25] Cf. Groth, C., Westaway, P. (2009), p. 37.

[26] Cf. Bordo, M., Filardo, A. (2005), p. 810.

[27] Own figure according to Groth, C., Westaway, P. (2009), p. 37.

[28] Cf. Belke, A. (2013), p. 96.

[29] Cf. Festa, A. (2012), p. 22.

[30] Cf. Genay, H., Podjasek, R. (2014), p. 1.

[31] Cf. Fabozzi, F. J., Drake, P. (2009), p. 124.

[32] Cf. Zuravicky, O. (2005), p. 4.

[33] Cf. Fontanills, G. A., Gentile, T (2001), p. 2.

[34] Cf. Barnes, P. (2009), p. 34.

[35] Cf. Miles, R. P. (2004), p. 85.

[36] Own Figure.

[37] Cf. Brott, R. (2007), p. 30.

[38] Cf. Mittal, M., Vyas, R. K. (2008), p. 6; Bolhuis, M., Goodman, N. (2005), p. 62.

[39] Cf. Keller, C., Siegrist, M. (2006), p. 91.

[40] Cf. Nick, M. (2012), p. 20.

[41] Cf. Pompian, M. M. (2008), p. 65.

[42] Cf. Pompian, M. M. (2012), p. 105.

[43] Cf. lonescu, G. H., Vilag, R., Vasile, I., Toader, S. (2009), p. 140.

[44] Cf. Pilz, G. (2008), p. 5.

[45] Cf. Lindmayer, K. H., Dietz, H.-U. (2015), p. 6.

[46] Cf. Belke, A. (2013), p.107.

[47] Cf. Nick, M. (2012), p. 13.

[48] Cf. Boone, N. M., Lubitz, L. S. (2004), p. 99.

[49] Cf. Milau, E. (2008), p. 80.

[50] Cf. Futch, T (2015), p. 204.

[51] Cf. Ellis, C. D. (2012), p. 6.

[52] Cf. Baker, H. K., Filbeck, G. (2013), p. 128.

[53] Cf. Bretzinger, O. N. (2010), p.13.

[54] Cf. Nick, M. (2012), p. 21.

[55] Cf. Allen, F., Carletti, E., Leonello, A. (2011), p. 262.

[56] Cf. Garman, E. T., Forgue, R. E. (2012), p. 385.

[57] Cf. Sulphey, M. M. (2014), p. 96.

[58] Cf. Garman, E. T., Forgue, R. E. (2012), p. 385.

[59] Cf. Baker, H. K., Filbeck, G. (2013), p. 129.

[60] Cf. Sincere, M. (2011), p. 3.

[61] Cf. Mittal, M., Vyas, R. K. (2008), p. 12.

[62] Own table.

[63] Cf. Hecher, C. (2013), p. 13.

[64] Cf. Elton, E. J., Gruber, M. J., Brown, S. J., Goetzmann, W. N. (2010), p. 649.

[65] Cf. Hecher, C. (2013), p. 13.

[66] Cf. Chandra, P. (2008), p. 276.

[67] Cf. Lee, A. C., Lee, J. C., Lee, C. F. (2009), p. 287.

[68] Cf. Gastineau, G. L. (2010), p. 20.

[69] Cf. Hecher, C. (2013), p. 15.

[70] Cf. Thiery, R. (2010), p. 3.

[71] Cf. Hecher, C. (2013), p. 16.

[72] Cf. Appel, M. (2009), p. 2.

[73] Cf. Wong, K. Y., Wai Cheong, S. (2010), p. 1615.

[74] Cf. Ferri, R. A. (2009), p. 41.

[75] Cf. Robertson, K. (2003), p. 3.

[76] Cf. Maeda, M. (2009), p. 45.

[77] Cf. Appel, M. (2009), p. 3.

[78] Cf. Lofton, T (2007), p. 6.

[79] Cf. Hecher, C. (2013), p. 206.

[80] Cf. Thiery, R. (2010), p. 62.

[81] Own Figure.

[82] Cf. Maeda, M. (2009), p. 46.

[83] Cf. Dehling, M. (2015), p. 28.

[84] Cf. Thiery, R. (2010), p. 49.

[85] Cf. Stevenson, D. (2010), p. 72.

[86] Cf. Hall, A. D. (2011), p. 90.

[87] Cf. Haslem, J. A. (2003), p. 3.

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Relevance of Exchange Traded Funds for Conservative Investors to Achieve Real Capital Preservation During Policy of Low Interest Rates
University of Applied Sciences Essen
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ETF, Exchange Traded Funds, Policy of Low Interest Rates, ECB, Capital Preservation, Financial Repression, Conservative Investors, Investments
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Bachelor of Arts (B.A.) Cam-Duc Au (Author), 2015, Relevance of Exchange Traded Funds for Conservative Investors to Achieve Real Capital Preservation During Policy of Low Interest Rates, Munich, GRIN Verlag,


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