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ETF Pricing Glitch Rattles BNY; SunGard Software Snafu

When it rains it pours. While many ETF investors have been sucker-punched while trying to execute orders during the past several highly volatile days, MarketsMuse finds that a second shoe dropped Monday on the heads of thousands of BNY Mellon customers thanks to a software snafu attributed to market data vendor SunGard systems. The “computer glitch” has impacted the Net Asset Value (NAV) pricing for nearly 800 exchange-traded funds and mutual funds administered by BNY, the world’s largest custodian.

According to the Wall Street Journal, BNY Mellon raised the alarm with regulators and held emergency calls with customers to try and resolve the problem.The system, known as InvestOne and run by financial software provider SunGard, resumed with limited capacity on Tuesday but was still not fully operational on Wednesday, leaving BNY Mellon with a backlog of funds to price.

sungard glitch1Morningstar, Inc., the fund research firm said that 796 funds were missing their net asset values on Wednesday, including ETFs operated by Goldman Sachs, Guggenheim Partners and several dozen mutual funds sold by Federated Investors. Invesco PowerShares Capital Management had 11 ETFs affected by the glitch, a spokeswoman said.

BNY Mellon said it was able to construct Monday net asset values (NAVs) for all affected funds. But there remains a backlog of Tuesday NAVs that still need to be generated.

The problems with calculating the net asset value of ETFs could raise trading costs for investors, said Todd Rosenbluth, director of ETF and mutual-fund research at S&P Capital IQ.

Several traders said they were forced to calculate their own net asset value for ETFs and that they widened the spreads, or the difference, between listed buying and selling prices to accommodate for the higher risk of trading.

“We measure our edge in terms of subpennies,” one trader said. “We can’t afford to be off by a penny.”

Early in the week, BNY Mellon notified regulators and U.S. stock exchanges about the issue. The Securities and Exchange Commission is monitoring the situation, an SEC official said.

“No one here can understand why it’s not up and running yet,” said one executive at a firm that was affected.

For the full coverage by the WSJ, please click here

 

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.”

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Top Managers Find Better Ways to Trade Tiny ETFs

By Murray Coleman

Heading into this month, just 25 funds held 61% of all the assets in U.S.-listed ETFs–and there are more than 1,458 on the market right now, according to investment researcher XTF Global. That herd-like mentality is credited by analysts to an emphasis–some say an overemphasis–on size and liquidity.

A growing number of ETFs focus on smaller niches and esoteric themes, which could be useful in a portfolio but their bid-ask spreads are often wider because they hold fewer assets and trade less often.

“There is a common misconception that if an ETF is trading at relatively low volume levels and isn’t a leading asset gatherer, it’s best to stay away,” says Alec Papazian, a strategist at Cerulli Associates who has studied such issues.

Size is relative, and prices are often more competitive than they might seem at first glance, says Doug Sandler, chief equity officer at RiverFront Investment Group in Richmond, Va. “Basing a decision purely on an ETF’s liquidity and size is one of the dumbest investment moves anyone can make,” he asserts. “Market makers often don’t spend their time publicly streaming quotes of ETFs with low liquidity,” he says. “We’ve found that working with a specialist to source better deals has been a powerful tool.”

Brad Thompson, chief investment officer at Stadion Money Management in Watkinsville, Ga., agrees. The firm, which manages $5.5 billion in assets, figures its average ETF spread nets round 0.20% across all types of funds.

Stadion’s managers say they’ve been able to trade in larger volumes and significantly narrower spreads for ETFs tracking bond markets as well as alternative asset classes. In the past, such trades have included: the iShares Barclays Agency Bond (AGZ); the iShares S&P Global Timber & Forestry (WOOD); the SPDR S&P Emerging Europe (GUR); and the iShares S&P North America Technology Sector (IGM).

“If you’re a professional adviser and money manager, there are ways to use your firm’s asset base to leverage better trades,” says Chris Hempstead, a director at execution specialist WallachBeth Capital in New York. “The so-called ‘top of book’ price you see on a computer screen, representing the best bid or ask price as disseminated by the exchanges, is just a starting point.”

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