Tag Archives: ETF issuers

Sell This Rumor: Hedge Funds Exploit ETF Ecosystem

The battle between business news pontificaters across the 4th estate is in full season, as evidenced by a smart article yesterday by Bloomberg LP’s Eric Balchunas and suggests that MarketsMuse curators are apparently not the only topic experts who noticed and took aim at a recent WSJ article that proclaimed savvy hedge fund types are increasingly exploiting exchange-traded funds by arbitraging price anomalies between the underlying constituents and the ETF cash product that occur in volatile moments.

That original WSJ article, “Traders Seek Ways to benefit from ETF woes …At the Expense of Investors” was misleading, and as noted by MarketsMuse Sept 30 op-ed reply to the WSJ piece, one long time ETF expert asserted that WSJ’s conclusions was “much ado about nothing.” Bloomberg’s Balchunas has since reached a similar conclusion; below are extracted observations from his Oct 12 column..

Hedge funds may need to get back to the drawing board if they’re planning to turn around their performance struggles by capitalizing on “shortcomings in the ETFs’ structure” via some unusual trade ideas, as highlighted in this recent Wall Street Journal article. Most funds do nothing of the sort.

Eric Balchunas, Bloomberg LP
Eric Balchunas Bloomberg LP

The vast majority of ETF usage by hedge funds is very boring. They love to short ETFs to get their hedge on and isolate some kind of risk. For example, they may short the Health Care Select Sector SPDR ETF (XLV) and then make a bet on one of the health-care stocks in the basket in order to quarantine a single security bet. Hedge funds have about $116 billion worth of ETF shares shorted, compared with only $34 billion in long positions, according to data compiled by Goldman Sachs last year.

The $34 billion in long positions is them using ETFs like everyone else — as a way to get quick and convenient exposure to a particular market. For example, the world’s largest hedge fund, Bridgewater Associates, has a $4 billion position in the Vanguard FTSE Emerging Markets ETF (VWO), which it has held for six years now.  There’s also Paulson & Co.’s famous $1 billion position in SPDR Gold Trust (GLD), which it has been holding for almost seven years. Like anyone else, they like the cheap exposure and liquidity VWO and GLD serve up.

With that context in place, yes, there are a tiny minority of hedge funds that engage in some complex trades like the ones highlighted in the article. But each trade comes with at least one big problem.

Before anyone tries any of these at home, it’s important to deconstruct them.

Trade #1: Robbing Grandma

How it works: During a major selloff, try and scoop up shares at discounted prices put in by small investors using market orders.

The problem: It’s super rare. Aug. 24, which saw hundreds of ETFs trade at sharp discounts amid a major selloff, was basically an anomaly. At best, a day like that happens once every two years. Thus, to capitalize on discounts of the 20-30 percent variety is like standing on a beach waiting for a hurricane to hit. And you won’t be the only one, so you may wait two years only to find you can’t get your order filled on the day the big one hits. In addition, no large institutional investors are putting in market orders. So this low-hanging fruit is sell orders for tiny amounts put in by unknowing small investors. Essentially this is the white-collar equivalent of robbing Grandma for some loose change in her purse.

Moreover, Aug. 24 may never happen again, at least the way it unfolded. ETF issuers are working with the exchanges, the regulators, and the market makers — and even making significant recommendations — to make sure those kinds of small investors aren’t exposed again like that.

It should be noted, though, that arbitrage between the ETF price and the value of the holdings happens day in and day out with ETFs — that’s how ETFs work. They rely on a network of market makers and authorized participants to arbitrage away the discrepancy between the ETF’s underlyings and its net asset value (NAV).

Trade #2: The Double Short

To continue reading the straight scoop from Bloomberg columnist Eric Balchunas, click here

BATS Exchange Goes Bats Again;Pay For Orders, Now Pay For ETF Issuer Listings

MarketsMuse ETF Curators debated on the title to this story, and first suggested the headline “Has BATS Gone Bats?!” While market structure experts continue to debate the topic of pay-to-play, i.e. payment for order flow schemes, BATS Global Markets, the youngest and arguably, now one of the largest electronic exchanges in the global marketplace based on trade volume across equities, ETFs and options is proving again Donald Trump’s moto: “Controversy Sells!”

According to the firm’s announcement last night, BATS is upending the traditional fee model for companies to list on an exchange-one that had Issuers paying the Exchange for the privilege of listing the company’s securities in consideration for the respective exchange’s brand integrity and financial ecosystem integrity. Instead, BATS, in effort to capture a lead role in the Exchange-Traded Fund space is now offering to reverse the business model and will pay ETF Issuers to list their products on the BATS exchange platform.

The way in which ETF products trade has recently come under close scrutiny by market regulators and institutional investors in the wake of both disconnected NAV prices of the cash product v. the underlying constituents during volatile periods and in connection with leveraged ETF products performing in unanticipated ways v. the way in which respective marketing materials proclaim those products can be expected to perform.

As noted in today’s WSJ story by Bradley Hope and Leslie Josephs..

The Lenexa, Kan.-based exchange operator on Thursday plans to launch what it calls the BATS ETF Marketplace, which will pay ETF providers as much as $400,000 a year to list on BATS. Payments will vary depending on average daily volume.

Traditionally, ETF providers have paid between $5,000 and $55,000 a year to list on a stock exchange. BATS previously offered firms the option to list on its exchange for free. Besides the monetary incentive, the marketplace is also changing the way it rewards market makers for continuously offering to buy or sell ETFs, a move it said will help reduce volatility.

“We are redefining the relationship between ETF sponsors, investors and market makers,” CEO Chris Concannon said in an interview.

ETFs have come under greater scrutiny after they faced trading issues on Aug. 24, including prices of ETFs being far out of whack compared with the prices of the underlying holdings. Exchanges, market makers and ETF sponsor firms are in discussions about how to make wider changes to rules to help prevent similar problems from happening.

“August 24 obviously makes us go back and say: ‘Are our decisions the right ones?’ ” said William Belden, managing director of ETF strategies at Guggenheim Investments LLC.

For the full coverage from the WSJ, please click here

New Rules: SEC Set to Level Playing Field for ETF Issuers

Are you beginning to wonder why there is an avalanche of news stories profiling corporate bond ETFs? As we’ve posted here at MarketsMuse.com, one good reason might be rising concerns that when interest rates tick up and bond prices tick down, there could be a rush to the exits on the part of investment managers seeking to sell their corporate bond ETFs (or looking to sell select ETFs so as to hedge portfolio exposure in underlying issues held by these managers). Reuters’ Jessica Toonkel and Ashley Lau touch on that topic in recent story profiling a plan on the part of the SEC to “level the playing field” for newer firms entering the ETF Issuer club.

Here’s the extract:

By Jessica Toonkel and Ashley Lau

Reuters – The U.S. Securities and Exchange Commission may strip Vanguard Group, BlackRock Inc and State Street Corp, the oldest and biggest providers of exchange-traded funds, of an advantage they hold over newer rivals in how they assemble the shares of their funds, said sources familiar with the SEC.

etf-issuer-sec-level-playing-fieldsBut BlackRock, Vanguard and a few others, who were among the first to apply with the SEC to create ETFs, are allowed greater leeway: if they need a difficult-to-find security to create shares of their funds, they are permitted to use a similar security – not necessarily the same one – in the fund. This greater flexibility makes it easier and cheaper to run the older funds, and harder for newer entrants into the market such as Northern Trust, Van Eck Global and Charles Schwab Corp to compete.

The agency’s tentative plan – still in its early stages – would affect how companies manage their portfolios in illiquid markets, such as bonds. It may result in allowing the likes of Schwab to compete better with their older rivals, as well as manage their existing bond products at a lower cost.

The agency’s tentative plan – still in its early stages – would affect how companies manage their portfolios in illiquid markets, such as bonds. It may result in allowing the likes of Schwab to compete better with their older rivals, as well as manage their existing bond products at a lower cost.

For the full story from Reuters’ Jessica Toonkel and Ashley Lau, please click here

LIVE FROM ETF.com Conference: Expert Bashes ETFMs

Markets Muse senior staff dumped their snow boots and instead, has boots on the ground at the Florida ETF boondoggle hosted by ETF.com. One of the more reportable take-aways (so far) is our capturing the following comment about the much talked about new product trend focused on non-transparent, hedge fund-esque ETFs,  courtesy of one industry expert (who chooses not to be cited for fear of having to check under his car every day before starting the engine):

“Actively-Managed ETFs aka ETMFs will only benefit ‘Issuers’ and respective ‘managers’ who promote HF-style styles under the guise of a so-called “index.” At best, this is a marketing ploy to capture AUM and fees for a product that is completely counter-intuitive to the premise that made ETFs attractive in the first place (transparency and hence liquidity). Hedge Funds such as those managed by the Jeff Gundlach’s of the world charge “2 & 20” but can only target a relatively small universe of investors. With the assortment of ETMFs on the drawing board, the only thing that is clear and transparent is that these ‘ETMF innovators’ are merely trying to ‘scale’ their secret-sauce models by targeting millions of less-sophisticated investors (via a 50% reduction in typical management fees) and folks who would otherwise not pass the institutional investor litmus test (QUIB) for a typical hedge fund that changes its positions more frequently than most folks change their underwear.”

ETF.com Announces Finalists for ETF Industry Beauty Pageant Awards; 25 Categories; 100+ Nominees

“And the nominees are…” MarketsMuse update profiles ETF industry portal ETF.com annual awards for ‘Best Of’ across 25 different categories, with more than 100 nominees. Winnners will be announced at an awards dinner that will take place March 19 at Pier 61 in New York City.

Below please find the extract from the ETF.com announcement.

“….In recognizing the forces that support the growth of the ETF industry, each year at its annual ETF.com Awards Dinner ETF.com recognizes the people, companies and products that are moving the industry forward. The dinner takes place March 19 at Pier 61 in New York City.

The award selection process follows three steps:

  1. An open nominating process
  2. A “Nominating Committee” composed of senior members of ETF.com’s editorial and analytics components narrows the nominees to a maximum of five in each category
  3. A “Selection Committee” of independent ETF experts votes on the winners.

The nominees are:

Category 1: Lifetime Achievement Award

Awarded annually to one living individual for outstanding long-term contributions to ETF investor outcomes, whether from a position of media, regulation, product provider or investor. Previous winners are not eligible.

Nominee No. 1: John Bogle
From an untiring emphasis on the “humble arithmetic” of indexing, to the customer-owned structure of his brainchild, Vanguard, there’s zero doubt that Jack Bogle is perhaps the biggest reason fund fees are falling and getting lower. Even his cranky critique of the perils of over-trading ETFs is, in its way, laudable: He truly wants what’s best for investors.

Nominee No.2: Lee Kranefuss
You won’t find an executive with more ETF-specific “street cred” than Lee Kranefuss. His almost-evangelical belief that the future of investing belonged to ETFs has been crucial to the rise of the industry. Under his direction, iShares grew to be the biggest ETF issuer in the world, and the unrivaled breadth of the company’s product line serves as the perfect metaphor of the power of ETFs.

Nominee No. 3: Burton Malkiel
Burton Malkiel put indexing on the map with his 1973 book, “A Random Walk Down Wall Street.” An enthusiastic proponent of index–based investments and ETFs, this Princeton academic remains engaged in many realms of the investment business, not least at chief investment officer of Wealthfront, the biggest player in the new “robo-advisor” field.

Nominee No. 4: Gus Sauter
During his 25-year career at Vanguard, Gus Sauter saw the firm shift from upstart to the biggest mutual fund company in the world. Sauter’s emphasis on indexing, on thoughtful diversification in asset allocation and on encouraging investors to stick to their plans puts Sauter and his nearly decade-long stint as CIO at the very center of Vanguard’s spectacular rise.

Category 2: ETF of the Year – 2014
Awarded to the ETF that has done the most to improve investor opportunities and outcomes in 2014, by opening new areas of the market, lowering costs, delivering new exposures or otherwise creating better options for investors. There is no requirement on when this fund launched.

Nominee No. 1: Global X GF China Bond (CHNB)

As the first ETF to provide access to China’s onshore bond interbank market, CHNB opened up the third-largest fixed-income market in the world. The fund pulled in nearly $50 million in investor flows in 2014, and offered investors the opportunity to access a relatively high-yielding asset with low credit risk.

Nominee No. 2: PIMCO 25+ Year Zero Coupon U.S. Treasury (ZROZ | C-57)
2014 was supposed to be a year of rising interest rates. Instead, rates plunged, and funds on the edge of the duration spectrum like ZROZ returned nearly 50 percent. As the longest-duration US-bond ETF, ZROZ was well positioned to ride 2014’s surprise rate drop. With a 0.15 percent annual expense ratio, ZROZ allows cheap, efficient access to the longest-term U.S. Treasuries.

Nominee No. 3: Vanguard Total International Bond (BNDX | B-57)
Vanguard broke new ground in the ETF world by offering the first global ex-U.S. broad-market bond fund. While other global-ex U.S. fixed-income funds cover parts of the bond universe—sovereigns or corporates—BNDX covers the entire non-USD investment-grade bond market. Vanguard’s choice to hedge BNDX’s currency exposure reduces the number of risk considerations for U.S.-based investors. At 20 basis points, the fund is very well priced, and quite efficiently run. The fund pulled in more than $2 billion in net inflows in 2014.

Nominee No. 4: Vanguard Total Stock Market (VTI | A-100)
Among the 38 ETFs offering total U.S. stock market exposure, VTI stands out for best representation and exceptionally low costs. With nearly 3,700 constituents, VTI captures virtually the entire investable U.S. equity market. Better still, VTI actually costs less than its published expense ratio of 5 basis points, with an average actual tracking difference versus its index of just 2 bps. VTI covers the entire U.S. stock market, basically for free; it’s hard to argue with that.
Nominee No. 5: WisdomTree Europe Hedged Equity (HEDJ | B-48)
The only nonvanilla ETF to make the top 10 flows list in 2014, HEDJ has captured the attention (and dollars) of tactical investors looking to make a currency-hedged bet on eurozone equities. With the euro on the rocks, its ability to protect against falling currency meant it outperformed non-hedged European equity ETFs by 10-12 percent for the year. HEDJ attracted $4.9 billion of inflows in 2014.

Category 3: Best New ETF – 2014
Awarded to the most important ETF launched in 2014. Note: Importance is measured by the overall contribution to positive investor outcomes. The award may recognize ETFs that open new areas of the market, lower costs, drive risk-adjusted performance or provide innovative exposures not previously available to most investors. Only ETFs with inception dates after Jan. 1, 2014, are eligible.

Nominee No. 1: EMQQ Emerging Markets Internet & Ecommerce (EMQQ | B-48)

As amazing as emerging market funds like VWO, EEM or IEMG are, they do have some conspicuous holes, which EMQQ aims to fill. Investors who want to own all of the emerging markets cannot overlook EMQQ, which will give them access to Internet and e-commerce companies that are typically excluded from traditional indexes because they are listed on the New York Stock Exchange.

Nominee No. 2: First Trust Dorsey Wright Focus 5 ETF (FV | C-23)

FV is a perfect example of how flexible ETFs are. This fund qualifies as a catchy riff on the “smart beta” trend, putting into one convenient, dynamic and tradable fund-of-funds wrapper Tom Dorsey’s popular system of technical analysis. It was the fastest-growing new ETF launched in 2014, pulling in $1.2 billion in inflows.

Nominee No. 3: iShares Core Total USD Bond Market ETF (IUSB | D)

Broad-market bond funds that track the Barclays Aggregate overlook certain corners of the U.S. bond market: High-yield bonds are excluded from the Agg, for instance, as are many internationally issued bonds denominated in U.S. dollars. IUSB offers a broader take on the bond market, bringing extra yield to core bond exposure. It’s also cheap, charging just 0.15 percent a year in expenses.

Nominee No. 4: Market Vectors ChinaAMC China Bond ETF (CBON)

CBON offered U.S. investors access to Chinese debt issued in mainland China for the very first time. With the Chinese market rallying and bond opportunities looking thin elsewhere, this novel exposure is a welcome addition to the mix.

Nominee No. 5: PowerShares DB Optimum Yield Diversified Commodity Strategy (PDBC) This fund isn’t the first of its kind in the commodity space, but it is the cheapest, and that counts for a lot in a pocet of the ETF industry that remains relatively pricey. The fund allows investors to steer clear of cumbersome “K-1” tax forms reserved for futures while still enjoying futures-like exposure.

For the entire announcement from ETF.com, please click here.

Creating Your White Label ETF: Mark Your Calender Sept 29

etf-logo-final

Courtesy of ETFtrends.com and reporter Max Chen

Asset managers who want to dabble in the exchange traded fund space do not have to go it alone. Some of the most innovative ideas have been launched based on ETF service providers partnering with forward thinking managers.

Those who are thinking about putting their own strategy to work in an ETF wrapper can attend the upcoming ETF Boot Camp conference event that is slated for September 29 and 30 in New York City to hear from the largest ETF providers on how to foster relationships, the process for joining forces and the benefit of these partnerships. Seeking to grow their assets under management, small money managers are taking a closer look at ETFs. However, some are turning to so-called white label, or turnkey, ETF companies to build and launch an investment idea.

ETF issuers like Exchange Traded Concepts, ActiveETF Partners, Golden Gate Investment Consulting LLC, ALPS, AdvisorShares and ETF Issuer Solutions, among others, help go through the regulatory approval process, provide a board of directors and get an ETF listed on an exchange for $20,000 to $100,000 in startup costs.

For instance, some small hedge fund managers see ETFs as an ideal way to increase assets under management. Smaller funds typically find it harder to bring in large pension funds and institutions that target large hedge funds with billions in assets under management and long track records. As a result, more are beginning to look at ETFs as a way to market their investment strategies, targeting financial advisors and retail investors instead.

“A lot of people are surprised that there’s no one way to do it,” according to Golden Gate Investment Consulting. “There are as many different operating models as there are ETF sponsors — you can outsource or take in-house just about any function.”

For the entire story from ETFtrends.com, please visit http://www.etftrends.com/2014/07/the-white-label-avenue-to-launching-an-etf/

 

 

NASDAQ New Rule: ETF Issuers Can Pay Market-Makers Quoting “Thinly-Traded” products

 

As duly noted by industry expert TABB Forum, ETFs with little-known or illiquid underlying securities are a hard sell without liquidity.  “Whether you loved or hated them, major exchange specialists (including this blogger) played a vital role to help nurture small listings, and the problem of how to incent liquidity provision is an ongoing industry debate. Without an extra incentive, market makers don’t consider it worth the risk..”

NASDAQ apparently understands this challenge. As reported by TABB, and in a rule filing submitted to the SEC, the exchange that will soon be home to Facebook proposes to put ETF issuers in the driver’s seat by facilitating issuer payments to market-makers in consideration for those traders quoting and trading those pesky, “hard-to-trade” aka “illiquid” ETF products that seem to trade by appointment only.

According to the TABB piece, “..The rule filing is waiting to be ‘noticed’ by the SEC, which will start turning the wheels of the rule filing and formal commentary process. If ultimately approved, the writing is on the wall for equities.There is little on the regulatory table at the moment to improve market quality, but prior success of a similar program abroad and political concern over how to improve the lot of smaller securities at least gives this proposal a decent chance of making it to the pilot…”

Not everyone fully agrees. At least one former ETF market-maker who was invited by NASDAQ to help formulate their new proposal believes it could open Pandora’s box (even if some think the Genie is already out of the bottle..) Continue reading