A1.ETFs are investment trusts which are managed with the aim of tracking the daily movements of a stock price index, such as those seen on TV and in newspapers, and are listed and traded on stock exchanges.
（Note)
・ETF is an abbreviation for "Exchange Traded Fund".
1. Because information on the indicator is reported daily by the news media and other organizations, price movements and changes in profit/loss are easily grasped. Therefore, ETFs make for a beginner-friendly product.
2. Because the underlying assets are widely diversified, ETFs are said to lower investment risk.
3. Initial investment with ETFs is possible with several thousands or tens of thousands of yen.
A3.Because ETFs are listed on stock exchanges, purchase/sale price set by investors, which is different from regular investoment trusts. It is also able to be placed as limit orders or market orders same as stocks.
A4.Because ETFs aim to produce results which track an indicator, investment results are essentially similar for those whose underlying indicator is composed of the same issues. In such cases, it is recommended that comparisons be made on the basis of factors such as management cost (trust fees), trading units, and trading volume. This information is available in product outline pamphlets and daily market information. Additionally, it is possible to confirm whether results tracking the indicator are actually being achieved via the timely disclosure information for each issue.
A5.As with stocks, it is possible to buy and sell ETFs through securities companies throughout Japan. For dealing with foreign ETFs, please contact the securities company of your choice.
A7.In general, costs are the same as those for stocks, with one being the fee paid to the securities company when trading the ETF. Another is called the management fee (trust fee), which is a management fee borne by investors after purchase of an ETF. ETF management fees (trust fees) are generally low when compared to those of unlisted public investment trusts. Also, management fees (trust fees) are set at an annual rate in advance and are deducted from daily trust assets at a per-diem rate.
A8.The taxation of ETFs is the same as that for listed stocks and use of a specified account is possible.
However, "Foreign Investment Corporation Bonds (securities similar to investment corporation bonds issued by a foreign investment corporation)" are handled differently than other ETFs. For details, please contact the securities company of your choice.
A9.It is possible to buy and sell ETFs via margin trading. (As a general rule, in addition to selection as a standardized margin trading issue from the date of listing, issues capable of being loaned are also selected as loan trading issues.) Because margin trading is possible, ETFs are highly convenient due to being able to be sold on margin during periods where the market is in decline and bought back afterwards for profit. Profits from price changes from collateral are also able to be received, giving ETFs a leverage effect as well (risks also exist). For that reason, margin trading of ETFs is the same as trading Bull Index Funds (price gain rates which surpass the stock price index) or Bear Index Funds (price loss rates that surpass the stock price index). Convenience is further increased by the availability of auction trading. In the case of Bull and Bear Funds, futures trading is conducted on a daily basis to produce a leverage effect, which incurs costs and thus lowers performance. However, in the case of ETF margin trading, because collateral is deposited and profits from increases and decreases in price are received, there are no costs arising from trading.
A10.Yes, use of a specified account is generally possible. However, "Foreign Investment Corporation Bonds (securities similar to investment corporation bonds issued by a foreign investment corporation)" are handled differently than other ETFs. Additionally, there may be cases of some securities companies which do not handle such. Please inquire at your securities company for details.
A11.Dividends of ETFs are much in the same way as those for stocks. The amount rises and falls in accordance with management performance, so payment will not occur in some cases. Furthermore, gold and commodity index-tracking ETFs do not distribute dividends.
A12.Investors should primarily be aware of the following risks when investing in ETFs.
1. Capital and dividends are not guaranteed.
2. Because the fund’s assets are, as a general rule, all stock, it is subject to stock price movement.
3. In times of sudden fluctuations in the market, it may become difficult to track the underlying index.
4. In addition to the above, ETF prices may fluctuate due to a number of factors, including market demand.
A13.ETF trading takes into consideration the levels of stock indices, base values, and so on. Market price movements are determined by supply and demand. As such, base values, etc. may not coincide with the price movements of the market. In particular, if base values and market prices deviate significantly due to the suspension of creation and redemption of ETFs as a result of the closure of the foreign markets in which ETFs invest, arbitrage transactions and other similar transactions may not be conducted. The longer the situation persists, the further the deviation. When investing in ETFs, please refer to the information published by each asset management company and pay adequate attention to such risks.
A14.ETF trust assets are secure, according to the system. The asset management company only issues directions on the management of trust assets and is not responsible for holding the trust assets. Additionally, because trust banks are obligated to manage the trust assets separately from their own assets, even in cases of bankruptcy on the part of the trust bank, creditors will not be able to seize trust assets.
A15.In the secondary market for ETFs, in most cases, securities companies called "designated participants", which assist price formation, will place bids and offers based on the net assets per unit. Investors placing orders for regular trading amounts are generally able to conduct trading without problems. Additionally, though it is not reflected in the daily trading volume, the designated participant conducts creation (new issue) and exchange (redemption) of the ETF using the constituent issues of the underlying index in the issue market, and is thus able to respond to large orders of a certain amount or higher. In this way, price formation by designated participants in the secondary market and large orders through creation/exchange in the primary market provide a structure which increases liquidity. Even in cases of low trading volume, ETFs do not necessarily lose their liquidity.
A16.・Listing Criteria
Track of an underlying indicator is required by the ETF listing criteria.
・Delisting Criteria
In cases where an ETF no longer meets the listing criteria, it may be designated as a Security on Alert, for which there is a possibility of delisting, or a Security to be Delisted, for which delisting has been determined. Furthermore, delisting criteria pertaining to the number of beneficiary right units, numbers of beneficiaries, and trading volume were eliminated in the rule revision on November 1, 2007. Accordingly, under the current listing rules, ETFs will not be delisted for distribution or insufficiencies related to liquidity.
For details regarding the listing and delisting criteria, please refer to the "ETF Handbook". ETF Listing Criteria/Applications
A17.The following information is disclosed on a daily basis through the TSE homepage (Company Announcements Service) by investment companies conducting creation of ETFs.
-Number of listed beneficiary rights units, net assets, and net assets per unit (Daily)
-Disparity between net assets per unit and closing price of stock price index (Daily)
-Fund Earnings Information (Periodic), etc.
A19.There are no special rules for ETF trading which differ from those of regular stocks, as explained in detail below.
1. Trading Rules
・As with stocks, orders may be placed as limit orders or market orders.
・Tick sizes (order price) are also the same as those for stocks. In the case of TOPIX-tracking ETFs,
if TOPIX is at 1,600 points, the ETF will be priced at approximately JPY 1,600. This would mean it is handled the same as a JPY 1,600 stock. Because tick sizes for stocks up to JPY 2,000 are JPY 1, orders could be placed for a "JPY 1,601 bid" or a "JPY 1,602 offer".
2. Trading Units
・Just as trading units differ for each issue for stocks, they also differ by ETF products.
・For example, TOPIX-linked ETF has a trading unit of 100 units (or "100 shares"). At a price of JPY 1,600, it would be possible to trade with JPY 160,000 (JPY 1,600 x 100 units; fees, etc. not included).
3. Order Placement Method
As above, there are no differences with regular stock trading, therefore orders can be placed over the counter at a securities company or by designating the issue code on the internet trading screen.
4. Settlement Date
Settlement is conducted on T+2 or same day settlement. In the case of T+2 settlement, the money for the sale and the purchased ETF/ETN are exchanged on the 3rd day counting from the transaction date, in the same manner as regular stocks.
5. Dividends
As with stock dividends, dividends are paid from profits according to the earnings date. (However, there are cases where dividends are zero.) This is the same as payment of dividends following the account settlement date for investment trusts.
A20.The same market information is available as that for stocks. It is possible to view price (ETF market price), trading volume, and trading value, as well as best 5 bids and offers, and pre-opening quotes.
A21.Though there is no price limit for stocks on their initial listing date, because ETFs are a product that tracks an underlying indicator, price limits are applied on the listing date based on the base price. The base price is set to the closing price of the underlying indicator on the day preceding the listing date. For example, in the case of a TOPIX-tracking ETF with a base price of JPY 900, the price limit shall be JPY 800-1000. In the case of a Nikkei 225-tracking ETF with a base price of JPY 10,000, the price limit shall be JPY 8,000-12,000. From the following day, the base price shall be set to the final price in the ETF auction market (including special quotes) and price limits shall be applied, as with stock. Additionally, margin/loan trading is possible from the listing date (as a general rule, loan trading issues shall be selected from the listing date).
A22.TSE provides off-auction trading via ToSTNeT. By using ToSTNeT, the following types of highly convenient trading are possible.
1. For Individual Investors
It is possible to trade after the conclusion of the auction market, after seeing the closing price of the ETF on such date, thus meeting the needs of inexperienced investors who would like to trade having seen the closing price. For regular index funds, application must be made while the base price (trading price) for such date remains undetermined, however in the case of ToSTNeT, it is possible to purchase an index fund after the trading price has been set.
2. For Institutional Investors
Regarding EFP which exchange futures positions for equity positions, it is possible to use ToSTNeT for transactions where the price is determined between a securities company and an institutional investor. ETF are also exchangeable with equity baskets, and while EFP is conducted in the US, use of ToSTNeT facilitates smooth transactions. Additionally, just as active equity basket trading is conducted using ToSTNeT, it is also possible to execute large ETF transactions (=basket transactions) and avoid market impact over ToSTNeT.
For details of ToSTNeT, please refer to the following. ToSTNeT Market
A23.Short-selling restrictions essentially apply to ETFs, as well. The display and price restrictions for short-selling apply in cases of borrowing an ETF which you do not hold and selling it.
However, in consideration of the marketability of ETFs and nature of transactions, the following sales are exempt for short-selling restrictions (furthermore, as with stocks, margin sales by individual investors for 50 units or less per sale are exempt from short-selling restrictions).
・Short sales of ETFs which were allotted via division of beneficiary rights
・Short sales of stocks in cases where such stocks have been requested for exchange with an ETF
・Short sales of ETFs in cases where additional creation has been requested for such ETFs
・Sales for market-making purposes
Additionally, the following transactions shall be exempt from price restrictions only. (The display obligation still applies.)
・Short sales of ETFs in cases where the purchase of such ETF is made at the VWAP
・Arbitrage trading between ETFs tracking the same indicator
・Short sales of ETFs or stocks, etc. in cases of arbitrage/hedge trading of such ETFs or stocks, etc.
・Short sales of ETFs in cases of arbitrage/hedge trading of such ETFs and index futures
・Short sales of ETFs in cases of arbitrage/hedge trading of such ETFs and ETF options
・Short sales of ETFs conducted to standardize the price of such ETF with the underlying stock price index, etc.
A24.Because ETFs are managed with the aim of tracking the underlying indicator, arbitrage trading will occur using the fact that ETF price movements are similar to those of the underlying indicator and exchange/creation between certain equity baskets, etc. . As such, it is expected that arbitrage trading using such exchange/creation will be conducted.
The following are examples of arbitrage trading which uses additional creation in cases of the ETF price being higher than the underlying equity price. The difference in the ETF sale value and equity purchase value on T-date results in the arbitrage profit (loan costs, etc. are not included).
ETF
Stock
Additional Creation
T
Short sales of borrowed high-priced ETF
Purchase of low-price equity required for additional creation
1
2
3
- Receipt of sale money
- Delivery of ETF
- Payment of purchase money
- Receipt of purchased equity
Application for additional creation based on purchased equity
4
Repayment of ETFs to lender
ETF issuance
Additionally, in addition to arbitrage trading utilizing equity baskets, it is expected that ETFs will be used in index futures trading as well. For example, in cases where the ETF market price is at a discount to the equity basket, an ETF purchase combined with a new arbitrage position for purchase would result in a discount.
(Note)
・Foreign ETFs (overseas ETFs) differ from domestic ETFs in that creation and exchange may not be possible within Japan.
A25.Settlement of ETFs traded on the TSE market is conducted by securities company account transfer at Japan Securities Depository Center, Inc. (JASDEC). Furthermore, dividends from profits are paid to beneficiaries as of the base date according to the handling of domestic stocks. For dividends from profits for foreign ETFs, such dividends are received by the depository institution of the foreign ETF in its home country and paid to the designated bank accounts of beneficiaries via a bank handling dividend payments in Japan (trust bank, commercial bank) by transfer or postal money order.
A26.An investment corporation bond is a bond issued by an investment corporation (company-type investment trust).
A foreign investment corporation bond is a security similar to investment corporation bonds issued by a foreign investment corporation.
A27.The 5 physical metal ETFs (gold, silver, platinum, palladium, and metal basket) and 14 commodity ETFs from WisdomTree are foreign investment corporation bonds (securities similar to investment corporation bonds).
A28.WisdomTree is a financial corporation based in US. With a focus on commodity ETFs, WisdomTree has over 150 types of ETFs listed on exchanges in 6 European countries, Australia, and the US.
A29.The ETFs issued by WisdomTree is unable to exchange for commodities. Precious metal ETFs, such as gold, are backed by the physical metal. In contrast, energy, industrial metal, agricultural produce and other such commodity ETFs track the underlying indicators via bond, etc. holdings and swap contracts.
A30.The ETFs of WisdomTree fall under the category of investment corporation bonds issued by a foreign investment corporation. Starting in January 1, 2016, such ETFs will be handled as "listed shares, etc." under the tax system, and the capital gains, profit from redemption, etc. are, in principle, subject to separate self-assessment taxation as "income, etc. from transfer of listed shares, etc." These ETFs are also handled as a type of special account.
Note that while the above tax treatment information is based on verifiable sources, TSE cannot guarantee the accuracy of this information. For more information on tax treatment, please consult an asset management company or a tax professional.
A1.ETN is an abbreviation for "Exchange Traded Note". ETNs are notes issued on the credit of highly credible financial institutions which guarantee that the ETN tracks a specified indicator, such as a stock price index.
ETNs and ETFs are similar in that they both track a specified indicator. However, though ETFs are issued as beneficiary certificates backed by stocks or commodities, ETNs differ in that they hold no backing assets.
A2.ETNs may be issued flexibly and at low cost on the credit of the issuer by not using an investment trust structure, allowing investment in assets which are difficult to hold as backing assets, such as stocks in countries which limit foreign investment and commodities which are hard to hold.
For investors, because the issuer financial institution guarantees the correlation with the underlying indicator, there are no tracking errors. Also, costs associated with management are generally low.
A4.As with stocks, trading fees are required when trading ETNs through a securities company.
Additionally, investors must bear a management fee after purchasing an ETN. Management fees are specified in advance by the issuer at an annual rate, and the ETN’s redemption value (purchase value) is the underlying indicator’s price with the fee’s annual rate subtracted at a per-diem basis.
A5.Because ETNs are listed in the form of JDRs, the same securities taxes apply as those for stocks.
Additionally, as with stocks and ETFs, a specified account (for specified accounts withholding tax, an income tax return is generally unneeded) may be used for a securities trading account and is eligible for offsetting (consolidated taxation for corporations with other corporate income).
A6.Margin purchasing is possible for issues selected as standardized margin trading issues from their initial listing date. Furthermore, in cases where an issue is selected as a loan trading issue, both loan sales and purchases are possible.
Designation differs for each issue, so please check the information available on the TSE home page and Japan Securities Finance Co., Ltd. homepage.
A8.ETNs differ from ETFs in that they do not hold backing assets and are issued on the credit of the issuer financial institution. Thus, the credit risk of the issuer is involved. In addition to credit risk, there are risks associated with price movements and liquidity.
For details, please refer to the following page. Risks
A9.Because ETNs are designed as a note, they will be redeemed upon the arrival of the maturity date. Currently, most ETNs listed in the US and Europe also have maturity dates, however the period until maturity is often 30-40 years.
In cases where an ETN reaches maturity and final redemption occurs, such ETN shall be delisted. Because the ETN will be redeemed at a price based on the specified indicator, the ETN holder will receive such redemption money.
Furthermore, some ETN products are able to extend the maturity date, in which cases investors will be notified via disclosure, etc. in advance.
(1) Issuer Criteria
・Equivalent of a financial instruments business operator or registered financial institution with at least 3 years of continuous business operations
・No false statements on financial documents in the most recent 2 years
・Unqualified opinion or qualified opinion with exceptions on auditor reports in the most recent 2 years
(2) Financial Criteria
・At least JPY 500 billion in net assets
・Equity capital ratio of over 8%
・Credit rating of at least A- or equivalent
・Total amount 25% or less of net assets
(3) Marketability Criteria
・The redemption/purchase value tracks a specified indicator
・Response to request for redemption/purchase within a period of 5 business days
・Over 5 years remain until the maturity date
(4) Other
・Meets with listing examination criteria in accordance with other foreign ETFs (including JDRs) (ensure smooth circulation, designated depository institution, multiple listing on foreign exchange, conclusion of trust agreement, preparation of legal basis for issuance, presence of monitoring government body for issuer, public interest and investor protection, etc.)
2. Primary Delisting Criteria for ETNs
(1) Issuer Criteria
・Losing status as equivalent of a financial instruments business operator or registered financial institution
・Halt of business activities, dissolution, bankruptcy, etc.
・False statement, delayed submission, or adverse opinion/disclaimer of opinion on securities report
(2) Financial Criteria
・Net assets are under JPY 250 billion (continuous 3 year period)
・Equity capital ratio is 8% or less (continuous 3 year period)
・Credit rating less than BBB- or equivalent (continuous 3 year period)
・Total amount over 25% of net assets (continuous 3 year period)
(3) Marketability Criteria
・The redemption/purchase value does not track the specified indicator
・Does not respond to request for redemption/purchase within a period of 5 business days
・Less than 0.9 correlation with specified indicator (continuous 1 year period)
(4) Other
・Difficulties in ensuring smooth circulation, halt on book-entry transfer operations by designated depository institution, loss of multiple listing (delisting) on foreign exchange, termination of trust agreement, public interest and investor protection, etc.
A11.In addition to the statutory disclosure documents (securities registration statement/securities report), the following information is released by the ETN issuer through the TSE homepage (Company Announcements).
1. Daily Disclosure
Number of listed beneficiary right units, remaining total redemption value of ETN, redemption value per note, disparity between daily fluctuation rate of specified indicator and redemption value per note
（Note)
・"Remaining total redemption value" is generally equivalent to the total unredeemed face value of notes and equivalent to the total net assets of ETFs.
・"Redemption value per note" is equivalent to the base value of ETFs (total net assets per unit).
Because ETNs fall under foreign corporate bonds under laws and regulations, company information such as dissolution, bankruptcy, or dishonor, etc. is treated as material facts under insider trading regulations. As such, matters which are decided and matters which occurred are items for disclosure with importance to credit-related information.
2. Decisions by Listed Companies
Merger, demerger (limited to cases where all business is succeeded), transfer of all business, dissolution (excluding dissolution by means of a merger), petition for commencement of bankruptcy/ rehabilitation /reorganization proceedings, etc.
3. Occurrence of Facts
Fact leading to delisting, loss of status as a registered financial institution/ financial instruments business operator, half of business activities, government disposition, forfeiture of benefit of time, etc.
4. Earnings Information, etc.
Annual earnings, interim earnings, credit status, etc.
A12.Because ETNs listed on the TSE are JDRs of foreign corporate bonds under the Financial Instruments and Exchange Act, insider trading regulations pertaining to foreign corporate bonds apply. As such, in cases where material facts falls under dissolution, bankruptcy, dishonor, etc., insider trading regulations apply.
Furthermore, ETFs are not included in the specified securities, etc. which are subject to insider trading regulations.
A13.ETNs, like ETFs, do not have any special trading rules which differ with those of stocks.
・Auction trading, quotes, and daily price limits are the same as those for domestic stocks.
・Base price is a yen-converted price of the closing price in the issue’s home country. When there is no price in the home country or after a certain period following listing, the base price shall be the closing price in the TSE market.
[Trading Rules]
・ETNs are eligible for standardized margin trading.
・ETNs are eligible for auction and off-auction trading.
・ETNs are exempt from short-selling regulations.
A14.Settlement of ETNs traded on TSE is the same as that for stocks and ETFs, and is conducted by securities company account transfer at Japan Securities Depository Center, Inc. (JASDEC).
