1 a) Compare ETFs (Electronic / Exchange Traded Funds) with Mutual Funds studied

Question

1 a) Compare ETFs (Electronic / Exchange Traded Funds) with Mutual Funds studied in the class. Specifically look at the (i) common features, such as ownership and the financial assets involved; and differences between the funds.

b) How or in what way is the ETF connected to the Financial System. Specifically, think about the assets, involvement in financial institution or financial market with the justification (that is reasons) in mind.

2 . In the recent past, small business lenders (for example 'biz2credit', 'kabbage', 'CANCapital', and 'LendingClub') have become popular. Their major function is to provide loans to small businesses to carry on the day-to-day business operations. You may not need to do research in order to answer the following questions. But most definitely you would have to use your analytical mind and make connections to the material learned in the class.

a) Why are these lenders important to the financial system? Include the competition from the financial institutions (such as commercial banks, shadow banks) discussed in the class.

b) What do you think about the long run sustainability of these lenders? Think about what does it take to survive as lenders and what may be major hurdles for their survival.

Explanation / Answer

1a. The exchange traded funds are passive funds which directly track the index. The amount invested gets directly invested into the stocks in the same proportion as that of the index. Hence you money moves as the index and in near perfect correlation with the index. Since there is no requirement of an active fund manager to select companies to invest in, these are called exchange traded funds or passively managed funds. As an investor you own those stocks which are a part of the index

The Mutual funds on the other hand are actively managed funds, in which there are fund managers to select stocks that are suppose to perform better than the index. A mutual fund is expected to generate an alpha which is a percentage by which the mutual fund beats the market index. Hence the investors here own stock as per the vision of the fund manager and the objective of the mutual fund.

1.b. ETF's are connected to the financial markets in the sense that they track the index. For example, a bond ETF will track and give similar returns as that of the index and a equity ETF will mirror the stock market index. . An ETF holds assets such as stocks, commodities, or bonds and other combination of financial assets. Investor can buy or sell these funds throughout the trading day as they always trade near to their net asset value

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