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¾ Investment Procedure for ETF

Unlike MFs, created and

ETFs have primary markets and secondary terminated by Authorized Participants in the

markets. ETFs

are

primary market

and

traded like stocks secondary market.

by In

general investors and Authorized Participants in the this process, Authorized Participants conduct arbitrage

trading

to

narrow

the

gap

between

the

net

asset

value

of

the

underlying

portfolio

and the market price of ETF shares. ETFs the secondary market at a price

As a result, general investors can invest similar to that in the primary market.

in

Investors creating/terming the ETF

ETF

Securities

Seller

Company

ETF

Securities

Purchaser

Company

KRX

Exchange cash for ETF

cash

ETFs

AP

ETFs

cash

Capital

Stocks, etc.

Markets

Stocks, etc.

Fund d

¾ Difference between ETFs and MFs

Form of Deposit Additional Creation Listing Redemption Trade on Exchange Management cost

Transparency

Liquidity On-hour trade

Redemption

Short selling

ETF

securities possible presumed Redeemable in securities possible Low (no inter-firm securities transaction) Transparent (public notice of PDF and anticipated NAV) high Investors may trade at a market price on a real-time basis

Investor can decide the price and time of redemption

Short selling or selling through lending is possible; as a result, individual investors can manage risk through lending.

MF Open ended type Cash Possible Not necessary Redeemable in cash

Not possible High (cost transaction) N/A

of

Close-ended type

Impossible Presumed Impossible Possible inter-firm

securities

N/A

Investors do not know the precise price of creation or redemption until the net asset value, based on the closing price of the securities in the fund, is made available Investor does not know the precise redemption price because it is calculated based on the net asset value of fund by the closing price as of the business day immediately following the date of request for redemption Short selling or selling through lending is not possible; as a result, MF cannot be used as a means of managing the risk of individual investors

46

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