Section 10 - Chapter 5 - Exchange Trded Products (ETP).pptx

Section 10 - Chapter 5 - Exchange Trded Products (ETP) - Presented by Rohan Sharma - The CMT Coach - Chartered Market Technician CMT Level 1 Study Material - CMT Level 1 Chapter Wise Short Notes - CMT Level 1 Course Content - CMT Level 1 2025 Exam Syllabus

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1. Chapter 5 - Exchange Traded Products (ETP) SECTION 10 - COMPARATIVE MARKET ANALYSIS Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

2. Agenda What Are Exchange-Traded Products? Benefits for Investors ETFs Versus ETNs Leveraged and Inverse ETFs No Risk-Free Basket Real Estate Investment Trusts (REITs) ETPs and Market Breadth What Does a Technical Analyst Need? This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

3. Exchange-Traded Products Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

4. Exchange-Traded Products Key Facts About ETPs • Definition: Exchange-Traded Products (ETPs) are investment securities that trade on exchanges, similar to stocks, and derive value from underlying assets such as stocks, bonds, commodities, or currencies. • Types: o Exchange-Traded Funds (ETFs) – Passive funds tracking an index, sector, or commodity. o Exchange-Traded Notes (ETNs) – Unsecured debt securities issued by banks that track an index but do not hold underlying assets. o Exchange-Traded Commodities (ETCs) – Products backed by physical commodities or futures. o Leveraged & Inverse ETPs – Seek to magnify or provide the opposite return of an index (e.g., 2x S&P 500, -1x Nasdaq).

5. Exchange-Traded Products Key Facts About ETPs • Liquidity: Traded throughout the day like stocks, offering more flexibility than mutual funds. • Cost Efficiency: Typically lower expense ratios than actively managed funds. • Risk Considerations: Market risk, tracking errors, counterparty risk (for ETNs), and leverage risks.

6. Exchange-Traded Products Comparison of Different ETPs Feature ETFs ETNs ETCs Leveraged & Inverse ETPs Structure Fund that holds assets Debt security issued by bank Commodity-backed security Uses derivatives Underlying Assets Stocks, bonds, commodities Tracks an index, no holdings Physical or futures-based commodities Stocks, bonds, indices Risk Market risk, tracking error Credit risk, tracking error Commodity risk, tracking error High volatility, compounding risk Expense Ratio Low to moderate Low to moderate Moderate to high Higher due to leverage Best For Passive investing, diversification Index tracking with potential tax efficiency Commodity exposure Short-term trading, hedging

7. Exchange-Traded Products Quick Interpretations & Use Cases • Long-Term Investors: o Opt for ETFs with low expense ratios tracking broad indices (e.g., S&P 500 ETFs). • Short-Term Traders: o Leveraged & inverse ETPs can be used for tactical trading but should not be held long-term due to daily rebalancing risks. • Commodity Investors: o Use ETCs for exposure to gold, oil, or other physical assets. • Risk-Averse Investors: o Avoid ETNs due to credit risk since they are unsecured debt instruments. • Diversification Seekers: o ETFs provide access to multiple sectors, geographies, and strategies at low costs .

8. Exchange-Traded Products Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

9. ETFs vs. ETNs – Cheat Sheet Feature Exchange-Traded Funds (ETFs) Exchange-Traded Notes (ETNs) Structure Investment funds holding assets like stocks, bonds, or commodities Unsecured debt instruments issued by banks Underlying Assets Holds physical securities or futures contracts No underlying assets—tracks an index via issuer promise Issuer Risk No credit risk (assets are owned by fund) Subject to issuer credit risk (bankruptcy risk) Liquidity Highly liquid, trades on exchanges Liquid but may have wider spreads than ETFs Tracking Performance Can have tracking error due to fees, trading costs, and portfolio rebalancing Generally tracks indices more accurately (no holdings, just a promise) Tax Efficiency More tax-efficient due to in-kind creation/redemption May have tax advantages since they don't distribute capital gains Best For Long-term investing, diversification, stability Traders seeking exposure to niche assets without tracking error Examples SPDR S&P 500 ETF (SPY), Vanguard Total Stock Market ETF (VTI) iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)

10. Exchange-Traded Products Comparison Summary 1. Risk o ETFs: Safer because they hold physical assets. o ETNs: Riskier due to reliance on the issuer’s creditworthiness. 2. Performance Tracking o ETFs: May experience tracking errors due to fund management and trading costs. o ETNs: Tend to track the index more precisely because they don’t hold actual assets. 3. Tax Considerations o ETFs: Capital gains are lower because of in-kind share creation. o ETNs: No capital gains distributions, but selling can trigger tax events. 4. Ideal Use Cases o ETFs: Better for long-term investors seeking diversified exposure. o ETNs: Suitable for traders needing precision in tracking an index.

11. Exchange-Traded Products Interpretations & Investment Strategy • For Conservative Investors: o Choose ETFs for asset-backed stability and lower risk. • For Traders & Speculators: o ETNs may be useful for short-term plays, especially in niche markets like volatility indices. • For Tax Efficiency: o ETFs are good for minimizing taxable events; ETNs may be advantageous for deferring gains. • For Risk Management: o Avoid ETNs from issuers with weak credit ratings to mitigate default risk.

12. Leveraged ETPs Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

13. Leveraged ETPs Key Facts About Leveraged ETPs • Definition: Leveraged Exchange-Traded Products (ETPs) use derivatives (like futures and swaps) to amplify the daily returns of an index or asset. They typically offer 2x or 3x exposure to the underlying benchmark. • Types: o Leveraged ETFs – Seek to provide 2x or 3x the daily returns of an index (e.g., S&P 500, Nasdaq). o Inverse ETFs – Designed to deliver opposite performance (-1x) of an index. o Leveraged Inverse ETFs – Magnify the inverse return (-2x, -3x) of an index. • Key Features: o Short-Term Focus – Designed for daily trading, not long-term holding. o Compounding Risk – Returns can diverge significantly from the expected multiple over time due to daily resets. o Higher Fees – Costs are higher than traditional ETFs due to active management and use of derivatives.

14. Leveraged ETPs Use Cases for Leveraged ETPs 1. Day Trading & Short-Term Strategies o Traders use leveraged ETPs for quick gains when they anticipate strong market movements. o Example: SPXL ( Direxion Daily S&P 500 Bull 3x ETF) for bullish plays. 2. Hedging Portfolios o Inverse leveraged ETPs help hedge against downturns without shorting. o Example: SQQQ ( ProShares UltraPro Short QQQ -3x) to hedge against a Nasdaq decline. 3. Volatility Trading o Used to take advantage of short-term spikes in market volatility. o Example: UVXY ( ProShares Ultra VIX Short-Term Futures ETF) for volatility exposure. 4. Sector or Thematic Exposure o Amplifies gains in hot sectors like technology, energy, or financials. o Example: TQQQ ( ProShares UltraPro QQQ 3x) for tech-heavy Nasdaq 100.

15. Leveraged ETPs Comparison of Leveraged ETPs vs. Traditional ETFs Feature Leveraged ETPs Traditional ETFs Objective Amplify daily returns (e.g., 2x, 3x) Track index performance 1:1 Risk Level High (due to compounding and volatility decay) Moderate to low Holding Period Best for short-term traders (intraday or a few days) Suitable for long-term investors Tracking Error High over long periods due to daily reset Low Expense Ratio High (typically 0.75%–1.5%) Lower (0.03%–0.5%) Use of Derivatives Yes (swaps, futures, options) Rarely Best For Traders, hedgers, speculators Passive investors, long-term growth seekers

16. Real Estate Investment Trusts (REITs) Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

17. Real Estate Investment Trusts (REITs) Key Facts About REITs ✅ Definition: A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate across various sectors. ✅ Primary Benefit: Provides investors with exposure to real estate without the need to own or manage physical properties. ✅ Dividend Requirement: By law, REITs must distribute at least 90% of their taxable income as dividends to shareholders. ✅ Tax Advantage: No corporate income tax if they meet distribution requirements. ✅ Liquidity: Publicly traded REITs can be bought/sold like stocks, unlike physical real estate.

18. Real Estate Investment Trusts (REITs) Comparison: REITs vs. Other Investment Vehicles Feature REITs Stocks Bonds Direct Real Estate Investment Ownership Indirect ownership of real estate Ownership of a company Debt instrument (loan to entity) Direct property ownership Income Source Rental income, mortgages, or capital appreciation Dividends, stock price appreciation Fixed interest payments Rental income, property value growth Liquidity High (for publicly traded REITs) High Medium-High Low (selling property takes time) Risk Level Moderate Varies Lower risk High (market & management risk) Inflation Hedge Strong (rents rise with inflation) Moderate Weak Strong (real assets appreciate) Diversification High (across property types and locations) Industry-dependent Low Limited to owned properties

19. Real Estate Investment Trusts (REITs) Types of REITs Type Description Example Equity REITs Own and operate income-generating real estate (e.g., apartments, malls, offices) Simon Property Group (SPG) Mortgage REITs ( mREITs ) Provide financing through mortgages and mortgage-backed securities Annaly Capital Management (NLY) Hybrid REITs Combination of equity and mortgage REITs New York Mortgage Trust (NYMT) Publicly Traded REITs Listed on stock exchanges, offering liquidity Realty Income (O) Private REITs Not publicly traded, limited liquidity Institutional investors only Public Non-Traded REITs SEC-registered but not traded on exchanges Blackstone REIT (BREIT)

20. Real Estate Investment Trusts (REITs) Key Metrics for Evaluating REITs Metric Meaning Why It Matters Funds from Operations (FFO) Net income + Depreciation + Amortization – Gains on property sales Better measure of cash flow than EPS Adjusted Funds from Operations (AFFO) FFO – Capital Expenditures More precise profitability indicator Net Operating Income (NOI) Revenue – Operating Expenses (excluding interest & depreciation) Shows property profitability Dividend Yield Annual dividend ÷ Share price Indicates income potential Debt-to-Equity Ratio Total Debt ÷ Shareholder Equity Measures financial stability

21. Exchange-Traded Products (ETPs) and Market Breadth Final Takeaways ✅ ETPs can distort market breadth by concentrating gains in a few stocks. ✅ Leveraged ETFs and passive investing amplify trends, sometimes making breadth appear weaker or stronger than reality. ✅ Monitoring breadth indicators helps investors determine whether a rally is sustainable or at risk of reversal.

22. What Does a Technical Analyst Need? Final Takeaways ✅ Analysis of ETPs is very similar to that of stocks, mainly because ETPs trade on the same exchanges. Price and volume data are readily available. ✅ Away from the charts and similar to indexes, the technical analyst should be aware of what is tracked by a particular ETP. For example, two different ETFs tracking the same sector might contain different stocks.

23. Chapter 6 – Foreign Exchange (Currencies) SECTION 10 - COMPARATIVE MARKET ANALYSIS Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia