Tag Archives: chris hempstead

ETFs Test Market-Making Skills

marketsmedia logoCourtesy of Steve Marlin/MarketsMedia

With exchange-traded funds playing an increasingly important role in portfolio management, the ability to accurately price the instruments has placed a premium on market-making skills.

“ETFs are a unique breed of financial instruments,” said Chris Hempstead, director of ETF execution services at WallachBeth. “Order execution requires the ability to navigate these markets and compel liquidity providers to offer customers the most aggressive bids and offers.”

With upwards of 1,500 listed products in the U.S. alone, the secondary market for ETFs remains evolutionary, and liquidity in many ETFs is often elusive, despite the sophistication of screen-based electronic markets.

Chris Hempstead, WallachBeth Capital
Chris Hempstead, WallachBeth Capital

“ETF wrappers provide an efficient way to gain access to an index,” Hempstead said. “But not all ETFs have sufficient depth of quotes, so you need to partner with someone who knows how to value an ETF. Even SPY, the most liquid ETF, doesn’t trade exactly at NAV [net asset value]. For less liquid ETFs, the spreads could be considerably higher.”

Sourcing liquidity at the right price for ETFs, ETNs and CEFs requires an advocate with a wide net, unhindered visibility and unencumbered market access, one whose pool of liquidity extends beyond traditional screen-based markets and the boundaries that conventional brokers are constricted to. “Because we’re product experts we are able to use both traditional and tech-savvy means to quickly and efficiently canvass a broad and diverse universe of reliable liquidity providers,” Hempstead said. Continue reading

Surge in ETF Trading Foretells Volatile Summer

usatodaylogo  Courtesy of John Spence

A surge in exchange traded fund trading this week signals that investors should buckle up for a volatile summer.

ETF trading soared to about 40% of overall volume on Thursday, one day after Federal Reserve Chairman Ben Bernanke said the Fed may soon begin tapering its purchases of $85 billion a month of Treasury bonds and mortgages. The Dow Jones industrial average plunged 354 points.

“My ETF-monitoring screens were lit up like a Christmas tree,” said Chris Hempstead, director of ETF execution at WallachBeth Capital, in a daily update Thursday. “Almost every ETF on my radar was trading at multiples of a normal day’s volume.”

He said it’s not uncommon to see a few ETFs have trading volume that high on a given day. But Thursday’s action “was something I have never seen before,” he said.

Volume in an unprecedented number of ETFs topped $1 billion for the session, he added.

The largest ETF, SPDR S&P 500, traded about 300 million shares, its highest one-day volume in more than a year.

Trading also surged in volatility-linked ETFs, such as iPath S&P 500 VIX Short-Term Futures ETN, which some traders use as short-term hedges, or to speculate on stock sell-offs. Continue reading

Follow-On: Major Exchange Slug Fest in Battle for ETFs

tradersmag Courtesy of Tom Steinert-Threlkeld

Nasdaq, NYSE and BATS are slugging it out with incentives, new order types and a new exchange to resuscitate trading in ETFs…

Once it worked. Now, not so much.

For years, the Nasdaq Stock Market designated a single market maker for each exchange-traded product. Later, the BATS Exchange treated exchanged-traded products no differently than other equities. No special treatment for trading in ETFs.

Meanwhile, NYSE Arca created lead market makers and gave them premium rebates for trading in exchange-traded funds, and gave other market makers rebates as well.

Both models worked fine, as institutional and retail investors pulled out of mutual funds that invested in stocks and rushed in droves into exchange-traded funds that also held baskets of stocks-and could be traded like them, too.

Only about 82 million shares of ETFs were traded in an average day in 2004, accounting for 2.15 percent of consolidated volume. By 2008-at the height of the credit crisis-that had surged to 1.1 billion shares and 12.5 percent of all trading. By 2011, the 1.2 billion shares traded every day in exchange-traded products of all kinds accounted for 15.4 percent of all trading.

Then, the hammer dropped. Daily volume fell 22.0 percent last year, to 941,000 shares a day. And the share of trading went down to 14.3 percent, by Rosenblatt Securities’ count.

The bloom was off the boom-even as investors keep pouring money into the funds, adding another $16.6 billion into North American ETFs in the first quarter of 2013, with $1.4 trillion invested all told in ETFs, in the United States.

“Investing in ETFs is continuing to increase. It’s just happening in places other than the secondary markets, like NYSE Arca or Nasdaq or BATS,” said Laura Morrison, senior vice president for global indices and exchange-traded products at NYSE Euronext.

For the full article courtesy of TradersMagazine, please click here

Is a #Bitcoin ETF Next??

etftrends logo imagesCourtesy of ETF Trends’ Tom Lydon

Bitcoins, a type of highly encrypted digital currency, are surging on a wave of speculation and demand for alternative currencies as central banks continue to print.

Could we soon see the launch of a Bitcoin ETF? It’s an interesting idea, but experts say don’t hold your breath.

Bitcoins, which trade hands online, have surged over 14% in the past week, reports Jeff Cox for CNBC. The digital currency has jumped to $250. The Bitcoin is a type of decentralized digital currency based on a peer-to-peer network and can be exchanged through computers internationally without a financial intermediary. The system was first introduced by developer Satoshi Nakamoto in 2009.

As the digital currency gains momentum, some have floated the idea of a ETF backed by Bitcoins. Alternatively, Bitcoins could be a candidate for the exchange traded note structure, but the sponsoring bank would have to be willing to back the appreciation or depreciation of the Bitcoin currency. What started off as a joke, may not seem like a joke at all.

“With global BitCoin exposure north of $2 billion and global currencies on the verge of a valuation war one has to wonder how this new asset is going to make its way into our lives,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital.

Nevertheless, Hempstead does not believe Bitcoins can be structured to fit the ETF vehicle. For instance, if a Bitcoin ETF were to act like another currency offering, it would require futures contracts.

“You’d need securities that are based in Bitcoins,” Hempstead said. “Since the Bitcoin is unregulated and no futures exist, an ETF is not possible today.”

For the full article from ETF Trends, please click here

In Playing Europe’s Crisis, Creativity Helps–$HEDJ It..

mktbeat Courtesy of WSJ MarketBeat Columnist Matthew Jarzemsky

March 20, 2013

Investors are getting awfully creative in the way they play the volatility surrounding Europe and its crisis.

Amid a renewed flare-up of worries, one investor placed a big bet on European stocks but with a twist; dodging the impact of swings in the euro.

The tiny Europe Hedged Equity exchange-traded fund (HEDJ) stands to multiply in size in the next few days, thanks to a single $102 million trade yesterday.

Tuesday morning, an order hit the tape for 2 million shares of the exchange-traded fund at $50.72. HEDJ tracks a basket of European stocks while using derivatives to offset changes in the price of the euro and prior to Tuesday’s trade had just $46 million in assets.

On Tuesday, an investor who wanted exposure to the strategy likely enlisted a market maker to take the other side of the trade, said Chris Hempstead, director of ETF execution services at WallachBeth Capital LLC, a New York brokerage.

In this case, the market maker would “create” new shares of HEDJ by buying the underlying shares of stock, because the 2-million-share size of the trade sharply exceeded the roughly 900,000 shares of the ETF outstanding at the time.

“Now you’ve got a blockbuster trade, which will almost certainly be followed by creation of 2 million shares,” Hempstead said. “You’ll see assets go from 900,000 shares to nearly 3 million shares in one blink.”

For the entire WSJ MarketBeat report, please click here

ETFs Spike Above 30% of Market Trading as Euro Fears Return: ETF Trends

etftrends logo imagesCourtesy of John Spence, ETF Trends

The percentage of ETF trading relative to overall volume tends to shoot higher in headline-driven markets when asset classes are moving together on macroeconomic or political events.

That’s exactly what happened on Monday when global markets swooned on fears parliamentary elections in Italy will result in political gridlock. After months of simmering on the back burner, Europe’s debt crisis roared back into the news. [Italy ETF Swings Lower on Berlusconi, Election]

On Monday, ETFs accounted for 32% of overall dollar volume, and there have been multiple sessions in the past week when the share rose above 30%, says Chris Hempstead, director of ETF execution services at WallachBeth Capital.

Chris Hempstead WallachBeth Sep 2012 321
Chris Hempstead, WallachBeth Capital

“It’s rare when ETF volume goes above 30%,” he said in a telephone interview Tuesday morning.

Hempstead said he has seen the figure approach 40% on some days during the past few years.

“ETF trading spikes when people think events are highly correlated and macro in nature,” he noted. “When stock pickers are having a tough time and market correlations rise, that’s when we see the ETF percentage of overall volume start to creep up.”

For example, trading volume in volatility-linked ETFs soared in Monday’s risk-off attack as investors looked for shelter and hedges. The CBOE Volatility Index has jumped 54% in a week. [Volatility ETF Trading Surges on Market Jitters, VIX]

“When the percentage of ETF trading in markets pops, a lot of it is people putting on trades to hedge bets. It’s not buy-and-hold,” Hempstead said. Continue reading

ETF Trading Desk Head Says: “Risk is On…Today..”

Courtesy of the ETF Professor at Benzinga.com

U.S. equities and other riskier assets are in rally mode in the first trading session of 2013 after lawmakers finally got around to agrbenzinga-logoeeing on legislation that steered the U.S. away from the dreaded fiscal cliff. News that a deal was in the works ignited a rally on Monday while news that the cliff will be dodged has done the same today as the Dow Jones Industrial Average is up about 230 points at this writing while the Nasdaq Composite is sitting on a gain of 2.3 percent.

The tenor of Wednesday’s U.S. trading session is clearly risk on, so much so that before 10:30 AM Eastern time, the overall value of equities and ETFs traded was $73 billion, according to data provided by ETF execution firm WallachBeth. New York-based WallachBeth noted that only trading day in all of 2012 – December options expiration – saw equity value traded exceed $70 billion in the first hour of trading.

Chris Hempstead, WallachBeth Capital
Chris Hempstead, WallachBeth Capital

In a note to clients, WallachBeth Director of ETF Execution Services Chris Hempstead highlighted intense buying activity “on the ask” in several marquee broad market ETFs. Buying on the ask could be described as “panic buying” to some extent as traders that are willing to buy on the ask price being shown are indicating they are willing to pay up to acquire shares of a particular stock or ETF. The more times the ask price is hit, the more intense a rally becomes.

Read the full story at Benzinga.com


Attn: Pension Fund Mgrs: ETF Trading Choices Can Affect Costs and Execution

  By Ari Weinberg | November 26, 2012    

Pension fund managers considering expanding their use of exchange-traded funds must always bear in mind that trading ETFs is entirely different from trading stocks.

Entering a transaction without a clear understanding of the market dynamics for the ETF and the underlying stocks can be costly without the right precautions. The market impact can be more than the fee in basis points cited in the funds’ materials.

“The implementation of a trade is very important and, in some cases overlooked,” said Tim Coyne, head of ETF capital markets for State Street Global Advisors in New York. SSgA sponsors nearly $300 billion in U.S. exchange-traded products. Only in the past few years, with the surge in ETF issuance and trading, have market makers and institutional agency brokers begun to offer ETF-specific implementation shortfall models.

One of the selling points for ETFs is that they can be more liquid to trade than their underlying constituents, but this is only the case in a handful of funds, said Alex Hagmeyer, vice president for data analytics at Markit in Naperville, Ill.

Estimating market impact — the spread from arrival price to final price — to include the notion of ETF creations and redemptions can be complicated by market conditions. And the dynamics of ETF trading have several brokers and data analysts refiguring their implementation shortfall estimates, taking into account that liquidity in the ETF is not the same as the total liquidity available to the investor.

For pension fund managers passing through ETFs in a manager transition or when adding a liquidity layer in broad-market ETFs, market impact models may seem a distant concern but basis points on large transactions can add up.

“A lot of ETFs are quoted by market-making algorithms,” said Chris Hempstead, director of ETF Execution at WallachBeth Capital in New York. For this reason, the impulse to get filled instantaneously by sweeping the limit order book can have a negative impact on an ETF trade.

Mr. Hempstead paints a scenario of an ETF order for 10,000 shares — 1,000 shares filled at the displayed price and 9,000 a nickel away. “If the quotes fill in around your trade (back to the original price), you probably paid too much,” said Mr. Hempstead.

For the entire P&I article by Ari Weinberg, please visit Pensions&Investments online

WSJ Weekend: Managing ETF Costs-Focus on Fees & Order Execution

Courtesy of Jason Zweig / WSJ Columnist

On Sept. 21, Charles Schwab, SCHW -0.74%the discount broker, cranked up its publicity machine to announce it is cutting expenses on its 15 exchange-traded funds, or ETFs, by an average of 50%, to as low as 0.04%. Invest $10,000 and you can pay as little as $4 a year.

Could expenses go to zero? “Well, with our pricing adjustment, they do round to zero,” quips Marie Chandoha, president of Charles Schwab Investment Management. Schwab isn’t alone: 16 ETFs charge less than 0.1% in annual expenses, according to XTF.com, an ETF-rating website. Investing is within spitting distance of becoming free—and that is unambiguously worth celebrating.

Nevertheless, investors need to bear in mind that annual expenses are the most visible—but far from the only—cost of an ETF. Even as annual expenses race toward zero, you can still get clipped on other costs if you aren’t careful.

Let’s take a moment to put what is happening into historical perspective. In 1976, Vanguard Group introduced First Index Investment Trust (now the Vanguard 500 Index Fund ), which sought to replicate the return of the Standard & Poor’s 500-stock average. The fund’s expenses the first year, says Vanguard’s founder, John C. Bogle, ran at 0.43%.

Today, the cost of a $10,000 account in the same portfolio—now available both as the Vanguard 500 Index mutual fund and the Vanguard S&P 500 VOO -0.45%ETF—is as low as 0.05%. That is less than one-eighth what the same portfolio cost a generation ago and roughly 98% less than what a conventional mutual fund cost in the 1970s.

“There’s still lots of room for improvement” on fees, says Vanguard’s chief investment officer, Gus Sauter. “There’s a tremendous amount of [downward] pricing pressure in the marketplace now.”

Continue reading

Assessing the Merits of an ETF: Debunking Common Myths

Extract of white paper published by Chris Hempstead, Head of ETF Trade Execution for WallachBeth Capital LLC

With respect to analyzing and selecting ETFs, one of the most common and frustrating mistakes that I overhear is “..unless the fund has at least some minimum AUM ($50mm in many cases), or has average daily trading volume less than [some other arbitrary number] (say 250k shares) it should be avoided…”

Some other arguments against ETFs go so far as to suggest that “..ETFs need to have a certain history or track record before they should be considered…” Adding insult to injury is the claim that “investors are at risk of losing all their money if an ETF shuts down.”

In light of recent articles being picked up by media from New York to Seattle, I would like to dismiss a few of these common, yet unwarranted reasons to avoid an ETF based solely on AUM, ADV or track record.

 First, let’s address AUM:

“ETFs with less than $50mm should be avoided”

In order for an ETF to come to market (list on an exchange) the fund needs to have shares created. This process is often referred to as “seeding”. The ‘seeder’ is the initial investor who delivers into the custodial bank the assets required to back the initial tradable shares of the ETF in the secondary market. ETFs issue shares in what are known as creation units. The vast majority of ETFs have creation unit sizes of 25k, 50k or 100k shares.

When a ‘new’ fund comes to market, they are usually seeded with at least 2 units of the fund. There are very few examples of ETFs that come to market with more than $5mm in AUM or an excess of 200k shares outstanding. One recent exception comes to mind: Pimco’s BOND launched with ~$100mm AUM and 1mm shares outstanding.

Understanding that ETFs have to start somewhere, it would be difficult to explain how more than 55% of ETFs (excluding ETNs, Leveraged ETFs and Inverse ETFs) have garnered AUM in excess of $50mm.

In other words, someone had to take a close look and invest into the funds. The ‘I will if you will’ mentality is probably not how the most successful fund managers find ways to outperform.

Ten of the top thirty performing ETFs year to date have AUM below $50mm.


Congratulations to the pioneers who ‘went it alone’, as they say. Continue reading

MLPs: What You Didn’t Know-ETP Insight From An Expert

Chris Hempstead, WallachBeth Capital

It took only 18 months for assets in MLP exchange traded products to grow from almost nothing to nearly $7.5bb.

What’s more amazing is that while the number of ETPs available in the market has grown significantly, nearly all of the inflow of assets into MLP ETPs has been captured by only 2 funds:

AMJJPMorgan Alerian MLP Index ETN $4.2bb assets under mgmt.

AMLPAlerian MLP ETF $3.25bb assets under mgmt.

This success story has recently attracted more funds into the space and we expect that trend to continue.

The most recent launches in the MLP space are YMLP (Yorkville High Income MLP ETF) and the MLPA (Global X MLP ETF).

Here is the twist that precipitated this note: JPMorgan has announced (June 14) that they will cap the issuance in AMJ at 129mm notes.

This will bode well for the ETFs tracking the MLP space. A brief explanation below may help shed light on this.

When an ETP no longer allows for creations, the fund starts to trade like a closed end fund. The reasoning behind this is that the arbitrage mechanism which allows market makers to sell the ETP is no longer available. Without the ability to create, market makers may be less inclined to sell the fund short versus a hedge of the underlying assets.

It should be noted that this is only a cap of notes issued. Should the fund reach the cap (we expect it will very soon) and redemptions follow, the fund would allow creates until it reached the cap again.

So what happens now?

We simply wait and see. When AMJ reaches the maximum threshold, we will closely monitor the availability of AMJ notes available in stock loan as well as any premium in the funds pricing on the secondary market.This could bode well in the short term for existing holders of AMJ as the fund will likely trade at a premium once the creation facility is shut down. Early investors would not have expected this so it’s a win for them.

That being said, once this happens I expect investors looking at MLP ETPs will be drawn away from the AMJ ETN and towards the ETFs mentioned above. Why? With the creation facility wide open in ETF funds like AMLP, YMLP and MLPA we expect them to trade and track at or close to their respective net asset values. Continue reading

J.P. Morgan Alerian Fund ETN (AMJ) Already Shows Premium

  • Brendan Conway, June 22, 2012, 11:16 A.M. ET

The popular exchange-traded note whose share issuance was capped last week by J.P. Morgan Chase (JPM) is already trading at a premium. Investors who hold the JPMorgan Alerian MLP Index exchange-traded note (AMJ) can either cash out now with unexpected profits or they can ride the note’s unusual mechanics higher in hopes of even bigger gains.

But the outcome behind Door #2 is unpredictable. Nobody wants to be holding the bag if JPM suddenly reopens new shares. J.P. Morgan hasn’t said whether it will take that step. But if it does, the investment’s premium, which resembles what you see in closed-end funds, would collapse in a hurry. That’s a risk that investors will bear if they stick with this tracker of rich-yielding master limited partnerships.

The crux of the issue is that AMJ is no longer just a bet on master limited partnerships. It’s also a bet on what other investors who hold or want to hold the same J.P. Morgan note will do.

At the moment, there’s a 45-cent premium in AMJ’s market price versus the underlying assets, or about 1.2%. It will get bigger if more investors pile in.

“This is a free gift. But how long do you watch the premium build before you sell the shares out? It’s a question that the owners of AMJ have to ask themselves,” Chris Hempstead, a director at WallachBeth Capital tells Barrons.com.

Junk ETF Bond Volumes Signal Electronic Demand


by Lisa Abramowicz

Trading of exchange-traded funds that focus on junk bonds is soaring while volume in the underlying securities slumps as dwindling dealer holdings prompt investors to seek electronic platforms.

Volumes in the two biggest ETFs in June have climbed 22 percent above the six-month average while overall trading for the debt has sunk 9 percent, according to data compiled by Bloomberg. A record $1.67 billion of shares was traded May 31 in the funds from BlackRock Inc. (HYG) and State Street Corp. (JNK), equivalent to 35 percent of the day’s total volume for U.S. junk debt.

Hedge funds and individual investors recently may be able to articulate a trade more efficiently” through ETFs rather than the actual bonds, said Jason Rosiak, head of portfolio management at Pacific Asset Management, an affiliate of Pacific Life Insurance Co. in Newport Beach, California. “That could be considered an indictment on the bid-offer spread increasing due to dealers not taking a significant amount of risk.”

As trading becomes more difficult in the bonds, people will say trading in ETFs is more efficient,” said Chris Hempstead, director of ETF execution at WallachBeth Capital LLC in New York. “By trading the ETF, you’re transferring the onus for trading the bonds onto someone else.” Continue reading

High-Yield ETFs Lure Investors Bypassing Dealers: Credit Markets


reporting from Lisa Abramowicz

Exchange-traded funds that own junk bonds are attracting unprecedented sums of cash from institutional investors seeking to slip in and out of the market as dealer inventories decline.

Institutional holders own 51 percent of BlackRock Inc.’s high-yield ETF, up 11 percentage points this year, according to data compiled by Bloomberg. The portion at State Street Corp. (STT)’s fund has grown to 60 percent, a rise of 18 percentage points.

The two funds, which allow individual investors access to the junk-bond market for as little as $37.59 a share, are attracting buyers from Bank of America Corp. (BAC) to Northern Trust Corp. as primary dealers gut corporate bond holdings by 81 percent since 2007. The market shift was underscored last month, when an investor redeemed as much as $780 million shares in State Street’s fund for the equivalent amount of bonds.

“Liquidity is the main reason that we’re using high-yield ETFs right now rather than high-yield bonds,” Tim Anderson, chief fixed-income officer at RiverFront Investment Group LLC in Richmond, Virginia said in a telephone interview. “In the good old days you could call up one of the major firms and there’d be a halfway decent shot you could sell $15 million, $30 million of bonds to them on the line,” said Anderson, whose firm is the sixth-biggest institutional shareholder in State Street’s fund. “They’re not keeping the same inventories anymore.”

“ETFs have increasingly become a more viable way to express credit views,” said Eric Gross, a credit strategist at Barclays Plc in New York. “We’ve seen corporate bond liquidity go down across both investment grade and high yield.”

“As long as something like JNK or HYG is easy to trade and relatively liquid, I’m not sure why anyone would go through the hassle of chasing down all the bonds, unless they were very good at doing it,” said Chris Hempstead, director of ETF execution at WallachBeth Capital LLC in New York. “It may be an affordable way to get exposure to the bonds.” Continue reading

Institutional Investors Increase Use of ETFs, says Greenwich Associates

At first used by Institutional Investors for manager transitions, rebalancing and other tactics, fund managers strategic use of ETFs are on the rise, in particular to gain long-term exposure to desired asset classes, according to a freshly-published study by Greenwich Associates.

In the hot-off-the press study, “57% of institutional ETF users employ these products to achieve strategic allocation ranges, while 20% of institutional funds use ETFs for tactical purposes to achieve alpha, as do 38% of asset managers using these products.”

The study also concluded that “once institutions integrate ETFs into their manager transition or cash equitization processes, they relatively quickly begin seeing additional applications for the products.”  Of equal note, holding periods of ETFs by institutional fund and other asset managers is on the rise, according to the study.

Noted Chris Hempstead, head of ETF Execution for WallachBeth Capital, “The Greenwich study does a good job of confirming what we’re seeing and hearing from clients; more tactical applications, and those that have longer-hold horizons are adding an options overlay element to their strategies so as to cushion volatility and enhance overall alpha.”

For the full report, greenwich associates – strategic uses for etfs


Does Size Really Matter? (with ETF Returns)

According to Benzinga.com’s ETF Professor, its not necessarily the size of the ETF, but the motion when it comes to investor returns.

From Benzinga’s April 23 edition:

“..There are plenty of instances in life when bigger is better. When it comes to exchange-traded products, bigger isn’t always associated with better [4]. At least when it comes to what should be investors’ primary consideration: Returns.

It has been documented that ETFs and ETNs with low average daily volume [5] and an assets under management number that may not be viewed as impressive by the so-called experts can outperform. In fact, all investing in an ETF with a bigger AUM total does is lead investors to a bigger fund, not larger returns [6].

Fortunately, a move away AUM and average daily volume as the primary determinants of an ETF’s worth is already under way.

“Some of the traders we talk to are using AUM and ADV a lot less now,” said Chris Hempstead, head of institutional sales and trading at WallachBeth Capital. “Some hedge funds using ETFs to hedge might use the larger ETFs because they just need short-term exposure, but buy-side traders are using AUM and ADV less and less.”

The statistics back up the assertion that bigger isn’t always better with ETFs. In an interview with Benzinga, Hempstead noted that in the case of the nine Select Sector SPDRs, all have been outperformed by a comparable fund of smaller stature on a year-to-date basis. Continue reading

Better Take a Peak at China’s PEK..Premium Merchandise

Courtesy of the ETF Professor at Benzinga.com

Following the March 22 debacle concerning the VelocityShares Daily 2x VIX Short-Term ETN (NYSE: TVIX  that saw the now infamous ETN tumble 30% in that one trading day, traders and investors predictably wondered what exchange-traded product could be next to fall victim to a similar scenario.

That scenario being an ETF or ETN trading at an elevated premium to its net asset or indicative value. One fund that has been noticed trading at elevated premium’s to its NAV is the Market Vectors China ETF (NYSE: PEK [6]) and this has been the case since the ETF debuted in October 2010.

What some investors may not understand is the reason why the Market Vectors China ETF has previously traded at premiums to its NAV that have been as high as 12%, sometimes a tad more. PEK is the only U.S.-listed ETF that offers investors exposure to China’s A shares market, but since foreign investors are limited in owning Chinese A shares directly, PEK uses swaps and derivatives instruments to accomplish its objectives.

Noteworthy is the fact that PEK’s premium has started to shrink, coinciding with news announced earlier this month that the China Securities Regulatory Commission boosted the quotas for qualified foreign institutional investors to $80 billion from $30 billion.

Chris Hempstead, head of ETF trading for New York-based execution firm WallachBeth Capital, talked about the implications increased access to China’s A shares for foreign investors may have on PEK in an exclusive interview with Benzinga on Friday.

Chris Hempstead, WallachBeth Capital

“PEK trading an elevated premium to its NAV in the past was not a function of it not being able to create and redeem shares as was the case with TVIX,” Hempstead said. “There are completely separate reasons why PEK’s NAV has been elevated compared to TVIX and some of the other products.”

Hempstead explained that it is the process by which PEK accesses China’s A shares market that has led to the high premium to its NAV in the past. Continue reading

Exotic ETFs Going Mainstream

Leveraged and inverse exchange-traded funds received a lot of scrutiny during the volatility of last year. But now that volatility is down and equities are on the rise, investors are more and more viewing these once exotic products as just another way to take positions on the direction of the markets.

That was the opinion of ETF insiders speaking on the panel “Volatility and Leveraged ETFs” at the Security Traders Association of New York conference on Thursday. ETFs that are leveraged two, three times, or even more, or that move in an inverse relationship to indexes like the S&P 500, are slowly becoming more accepted.

Stephen Sachs, head of capital markets for ProShares, said that while ETFs drew a lot of attention during high-volatility periods last year, the actual evidence suggests those instruments did not cause the volatility. Leveraged and inverse products were only a small part of trading during those periods, and important macro events were also very much in play, he said.

“At the end of the day, volatility is not an asset,” Sachs said. He added that unlike actual asset classes, investors don’t take buy and hold positions on the VIX. Investors in VIX ETFs need to understand that the product exists for taking positions on risk, not for long-term investments.

Chris Hempstead, director of ETF execution at WallachBeth Capital, said inverse and leveraged products have gotten more than their fair share of press. However, they too serve a specific purpose, and the investment community needs to learn more about them.  “If you trade anything, you should be paying attention to the ETF market,” Hempstead said. “It [the market] is a lot harder [to understand] than it was five years ago.” Continue reading