How to Trade ETFs Ben Thompson Moderator Director, Business Development,

Ben Thompson
How to Trade ETFs
Moderator
Director, Business Development,
& Listed Products
Lyxor UK
Introduction
What is an Exchange Traded Fund?

Exchange Traded Funds (ETFs) are open-ended investment funds that track the
performance of a diversified index containing at least 5 different assets.
ACCESS
REGULATED
FLEXIBLE
SIMPLE
TRANSPARENT
Access a whole market sector,
region, theme, commodity
REGULATED
basket or fixed income strategy in a single fund
MARKET
Highly regulated according
to theACCESS
European regulatory framework
of the UCITS IV Directive and the exchange
Trade on exchange with liveFLEXIBLE
pricing throughout market hours and
the flexibility to trade in or out just like a share
SIMPLE
The aim of an ETF is simply to track a Benchmark Index as cost
effectively and preciselyTRANSPARENT
as possible.
Complete transparency over costs, risks, performance and fund
holdings
What Can You Trade In?
 Can be used to access a wide variety of asset classes, themes, sectors and
geographies
*As of May, 2012
Using ETFs in a Portfolio

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
ETFs are used by all types of investor; from large institutions to individual retail clients
As a passive tracking investment, the objective is simply to achieve the market return
Creates a simple risk / reward profile; if the Index moves 5%, the ETF aims to move 5% too
Covers the whole risk spectrum from Government Bonds to individual Emerging Markets
Used for either capital growth (Capitalising ETFs), or income (Distributing ETFs)
» Invest tactically to take
advantage of shorter
trends or opportunities
» Build an efficient, low cost
core portfolio to capture long
term growth
*As of May, 2012
Why ETFs Trade Just Like A Share
How Do You Trade?
Trading an ETF is as easy as buying or selling a share

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Prices are provided on the London Stock Exchange during market hours (08.00 – 16.30)
As such they are governed by the rules of the exchange for liquidity and spread
You buy at the Ask price and sell at the Bid price
The difference between the Bid and Ask price is called the Spread
They are eligible for trading direct, in a Stocks & Shares ISA or SIPP account
Single cash settlement process just like a share
SELL PRICE
BUY PRICE
BID
£9.99
ASK
£10.00
SPREAD
Where Can You Trade?


Most IFAs and investors will trade ETFs on a
platform or via a stockbroker account
ETF trading on UK platforms rose strongly in
2012:

Ascentric saw ETF asset growth of 50% H1, 2013
Nucleus ETF flows doubled to £9.6m H1, 2013
ETF assets on Axa Elevate rose 25% year on year

Raymond James reports “exponential” ETF growth



Not all platforms provide intraday liquidity.
Orders can be made once per day at single
price
How Do You Trade?
 The 4 step trading process is as simple as buying a share
Log in to the platform
account
Enter the EPIC or ISIN
code for your ETF
Input number of
shares required
Execute your order
 Like share trading you can execute your trade in one of four ways
Market order: trade
at best price now
Limit order: set a
specified price
Stop loss: set an
automatic level to
sell back
Stop limit order: set
price for purchase and
sale at the outset
What Happens Behind The Scenes?
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ETF prices are supported by multiple Market Makers
Market Makers are Financial institutions who:
 Quote Bid & Ask prices during market hours
 Within a given spread
 For a given trading size (volume)
More Market Makers means more competition over
price
More competition means tighter spreads (Bid / Ask)
Typically Market Makers are attracted to highly traded
ETFs
It is important to look at the volume traded each day
If your trade is larger than the quoted volume available
you could have to pay more on the Ask price.
EXAMPLE: LYXOR ETF (As of May, 2014)
» An average of 2.8 MMs for Lyxor
ETFs listed on NYSE Euronext
» 19 firms registered as Market Maker for Lyxor
ETF
How Much Is Typically Traded?
1,000
900
800
Secondary Market 2013 ADV = USD 513 mn / EUR 372 mn
700
600
500
400
300
200
100
0
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Source: Lyxor
Why ETFs Don’t Trade Like
Shares At All
ETFs Are Nothing Like Shares
ETF trading is nothing like trading shares


Unlike a traditional share, ETF prices are not entirely driven by supply and demand for the
ETF
This is because ETFs are open-ended and new units can be created or redeemed in a Primary
Market
DEMAND RISES
New ETF units are created
Supply rises

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
DEMAND FALLS
ETF units are redeemed
Supply falls
The value of an ETF is determined by the value of it’s Underlying Assets
This value is known as the Net Asset Value (NAV): the value of all assets – liabilities
The price that ETF units can be created or redeemed is the NAV per share (NAV / No. Units)
Creating & Redeeming ETF Shares
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SECONDARY MARKET
CASH
IFA
BID
PLATFORM
ETF
SHARES
ASK
PRIMARY MARKET
MARKET
MAKER
CASH / SECURITIES
ETF SHARES
AUTHORISED
PARTICIPANT
CASH /
SECURITIES

Creation and Redemption is conducted by exclusively by Authorised Participants (AP)
An AP may be a Market Maker or any other large financial institution with a lot of buying power
APs create new ETF units by exchanging cash or the Index’s underlying assets with the ETF
provider
In exchange, the ETF provider gives the AP a block of equally valued ETF shares
The AP can then sell the ETF shares to generate a profit
A ‘Redemption’ is essentially the same process in reverse
All costs for Creation / Redemption are met by the AP and passed through to the Bid / Ask spread
This means that ETF holders do not suffer trading costs as investors enter / exit the fund
ETF SHARES

ETF
PROVIDER
What Does This Mean For You?
This creation/redemption process has two major implications…

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ETF liquidity is determined not by the ETF, but by the Underlying Securities that make up the ETF
The price of an ETF trades in line the value of the Underlying Securities
 If the ETF price is higher than the Underlying Assets, the AP can buy the Underlying Securities,
create ETF units and sell them to the market for a profit
 If the ETF price is lower than the Underlying Assets, the AP can buy ETF units, redeem them against
the Underlying Assets and sell them to the market for a profit
ETF TRADING AT A DISCOUNT
ETF PRICE CONVERGES HIGHER
ETF TRADING AT A PREMIUM
ETF PRICE CONVERGES LOWER
This creates a key distinction with closed-end funds where no one can create or
redeem shares, and funds can trade at a large premium or discount to their NAV
Creating A More Efficient Market
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276 Lyxor ETFs are listed on 12 regulated exchanges
A multi-broker-dealer model includes 51 Authorised Participants and 19 registered Market Makers
More than 100 brokers in Europe
51 APs
19 Market Makers
Lyxor
Trade your order
Provide OTC prices & create / redeem ETF units
Offer Bid / Ask prices on Exchange
Efficient pricing at every level
Lower
costs
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More liquidity creates more efficient pricing, which reduces the spread you trade at
Lower Trading Costs
EURO STOXX 50 ETFs Spreads
Japan ETFs Spreads
0.14%
0.60%
0.12%
0.50%
JPN FP
0.10%
XMJP GY
IJPU LN
0.40%
0.08%
0.30%
0.06%
0.20%
0.04%
0.02%
0.10%
MSE FP
XESX GY
EUN2 GY
0.00%
0.00%
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jan-12
MSCI USA ETFs Spreads
0.80%
0.70%
0.70%
0.60%
0.60%
USA FP
XMUS GY
SSAM LN
Jul-13
Jan-14
LEM FP
XMEM GY
IDEM LN
0.50%
0.40%
0.40%
0.30%
0.30%
0.20%
0.20%
0.10%
0.10%
0.00%
0.00%
Jan-12
Jan-13
MSCI Emerging Markets ETFs Spreads
0.80%
0.50%
Jul-12
Jul-12
Jan-13
Jul-13
Jan-14
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Lyxor ETFs Bid Offer spreads on major exposures are usually tighter or in line with competition
Source: Lyxor
In Summary: 3 Ways to Trade ETFs
Secondary Market
(Trade of existing ETF units)
Exchange
Primary Market
(New units)
Over The Counter (OTC)
» On Exchange like a share
» OTC through a broker
» Most common for Advisers and
investors
» More common for professional
investors trading large size
» Trading during market hours
» Inside and outside of market hours
» Live pricing and trading
» Live pricing and trading
» OTC through a broker
» Professionals only
» Orders placed before cut-off
» Execution at the Net Asset Value
based on the index closing price
» Transparent execution based on
an official level
Cost = Bid-Offer Spread
Cost = Execution Price
Cost = Creation / Redemption Fee
+ Broker Fee
+ Broker Fee
+ Broker Fee
Tight Bid-Offer spreads and large on-exchange volumes are key for Advisers to
reduce their ETF Trading costs
The Primary Market setup is really
important to ensure cost-efficiency
and liquidity in the ETF
Other Things To Think About
Measuring Efficiency
The most efficient ETF is one that lowers the overall cost of ownership

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The Lyxor ETF Efficiency Indicator was created by Lyxor research to compare ETFs
The ETF Indicator takes into account the 3 major factors affecting an ETFs true performance
TRACKING DIFFERENCE*
How does the ETF perform
compared with its benchmark?
TRACKING ERROR**
How does the ETF behave compared
with its benchmark?
BID-ASK SPREAD***
What is the cost of buying and
selling the ETF?
38.50 / 38.51
Performance gap
- 1.65 x
Tracking Error
-
bid-ask spread
* Tracking Difference (in IOSCO terminology): Performance spread between the ETF and the benchmark index
** Liquidity Spread daily average of the first limit order spreads weighted by volumes for each listing place
*** Tracking Error ( in IOSCO terminology): Volatility of the performance spread measures on a daily basis over a 1 year period
Comparative ETF Performance
The following table looks at the comparative efficiency of a selection of ETFs
between March 28th, 2013 and March 31st 2014
Sources: Bloomberg and Lyxor. Past performance is not a reliable indicator of furture returns
For each index, the methodology defines a peer group based on ETFs issued by providers belonging to the Top 20 ETF Issuers list, as defined by ETFGI, an independent
research and consultancy firm. Each peer group includes the relevant Lyxor ETF share-class and the 4 largest ETF share-classes issued by other providers, representing
a level of market-share of at least 5% on the relative index. ETF sizes are considered as an average of the Asset Under Management levels observed over the relevant
time period. The performance of each ETF is determined by the change in Net Asset Value (NAV) between March 28th 2013 and March 31st 2014 included, with
dividends reinvested. The observed performances are net of management fees. For indices not denominated in EUR, Lyxor converted each closing index value into
EUR using the WM Reuters Forex Rate.
General Risk of Lyxor ETF
We recommend that investors read carefully the “risk factors” section of the Fund’s prospectus and the relevant Key Investor
Information Document*.
Any investment in these Funds involves certain risks, the main risks are as follows:
» CAPITAL AT RISK: ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying Index. Investors’ capital is
fully at risk and investors may not get back the amount originally invested.
» REPLICATION RISK: The fund objectives might not be reached due to unexpected events on the underlying markets which will impact the
index calculation and the efficient fund replication.
» COUNTERPARTY RISK: Investors are exposed to risks resulting from the use of an OTC Swap with Societe Generale. In-line with UCITS
guidelines, the exposure to Societe Generale cannot exceed 10% of the total fund assets.
» UNDERLYING RISK: The Underlying Index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Underlying Index
is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and
transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are
exposed to a wide range of unpredictable Emerging Market risks.
» CURRENCY RISK: ETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying Index they
are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
» LIQIUIDITY RISK: Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including
Societe Generale. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying
Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other market-maker systems; or
an abnormal trading situation or event. Trading prices will only be available in normal market conditions. For more information regarding trading,
please see the ‘Secondary Market’ section on page 28.
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*The documentation (prospectus and Key Investor Information Documents) of the Funds are available upon request to Lyxor AM or on the
website www.sglistedproducts.co.uk. The prospectus of Lyxor Index Fund is only available in English.
Secondary Market
 Lyxor Investors can buy or sell an ETF at any time in the Secondary Market prior to the Exercise Date on any regular LSE trading
day from 8.00 am to 4.30pm. The value of the ETF will vary on an intraday basis.
 Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Societe
Generale. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the
Underlying Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other
market-maker systems; or an abnormal trading situation or event.
 Cases in which there is no guarantee that liquidity will be available on the secondary market, and therefore normal market
conditions may not prevail, include where:
The Underlying Asset level is suspended or not tradable;
There is a failure in the LSE, Societe Generale or other market maker systems;
Abnormal trading conditions e.g. sudden and sharp volatility increase or lack of liquidity in the underlying.
This means that an investor may find it difficult or impossible in certain circumstances to sell the ETF or may be offered a price
less than they paid for it
Disclaimer & Important Information
This seminar is intended for educational purpose s only and as such is not a solicitation or recommendation to make an investment
based on the contents of thi s presentation. Investors should be aware that investments can fall as well as rise and if there is any
doubt over the suitability of a particular investment then you should seek independent advice.
This document is issued in the U.K. by the London Branch of Societe Generale. Societe Generale is a French credit institution (bank) authorised by the Autorité
de Contrôle Prudentiel et de resolution (the French Prudential Control Authority) and the Prudential Regulation Authority and subject to limited regulation by the
Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation
Authority, and regulation by the Financial Conduct Authority are available from us on request.
Although information contained herein is from sources believed to be reliable, Societe Generale makes no representation or warranty regarding the accuracy of
any information. Any reproduction, disclosure or dissemination of these materials is prohibited.
Lyxor and Lyxor ETF are names used by Societe Generale to promote the products of Lyxor Asset Management.Lyxor ETFs referred to in this document are
open-ended mutual investment funds established under French Law and approved by the Autorité des Marchés Financiers (the French Financial Markets
Authority).
The products described within this document are not suitable for everyone. Investors’ capital is at risk. Investors should not deal in these product unless they
understand their nature and the extent of their exposure to risk. The value of the products can go down as well as up and can be subject to volatility due to
factors such as Level changes in the underlying instrument and interest rates.
Prior to any in vestment in these products, investors should make their own appraisal of the risks from a financial, legal and tax perspective, without relying
exclusively on the information provided by us, both in this document and the Pricing Supplement of the product available on the website
www.sglistedproducts.co.uk. We recommend that investors consult their own independent professional advisors.
Investors should note that holdings in these products will not be covered by the pro visions of the Financial Services Compensation Scheme, nor by any similar
scheme.
The securities can be neither offered in nor transferred to the United States.
The tax statement is only a general guide. The tax treatment of investments will depend on an individual’s circumstances. If investors are in any doubt as to
their tax position, they must consult with an appropriate professional tax adviser. This statement of the UK tax treatment of the product is based on our
understanding of the laws and practice in force as of the date of this document and is subject to any changes in law and the interpretation and application
thereof, which changes could be made with retroactive effect.
For more information: see the Terms and Conditions available on our website www.sglistedproducts.co.uk
Thank You
Ben Thompson
How to Trade ETFs
Moderator
Director, Business Development,
& Listed Products
Lyxor UK