LIVE ETF Trading Session: How to Achieve Best Execution When

LIVE ETF Trading
Session: How to
Achieve Best
Execution When
Investing in Size
in ETFs
Matt Hougan
Moderator
President, ETF Analytics
Global Head of Editorial
IndexUniverse
Dave Nadig
Moderator
Director of Research
IndexUniverse
Reginald Browne
Panelist
Managing Director
Global Co-Head of the
Listed Derivatives Group
Knight Capital Group
David LaValle
Panelist
Vice President, Nasdaq
Transaction Services
NASDAQ OMX
Andrew McOrmond
Stan Ueland
Panelist
Managing Director
WallachBeth Capital LLC
Panelist
Vice President
First Trust
Bid/Ask Spread
Sell at Bid, Buy at Ask
Bid/Ask Spread
Sell at Bid, Buy at Ask
Bid/Ask Spread
Impact
Bid/Ask Spread
Market Order: Buy 1000 shares ABC
Market Order: Buy 1000 shares XYZ
Solution
Limit Orders:
Buy SPY Under $100
Sell SPY Over $100
Stop Limit Orders:
Buy SPY Under $110, if it’s traded through $100
Sell SPY over $90, if it’s traded through $100
1435 ETFs
77 new in 2012
875 in Registration
Spreads: ETFs vs. Underlying
SPY
IWM
ETF Average Spread
0.01%
0.01%
Underlying Average Spread
0.03%
0.36%
ETFs vs. Consolidated Tape
% of Total Market (incl. OTC/BB)
ETF Trading Activity
% of Cons Tape
% of Value Traded
0.3
0.2
0.1
0
14/03/2011
13/03/2012
Elephants & Knotholes
Trade
Bulls & Chinashops
Trade
ETF = Platypus
Mutual Fund
+
=
Stock
How An ETF Works:
100 shares of
SPY Please!
Broker
$9,723
[email protected] $97.23
How An ETF Works:
ETFs, Inc.
?
ETF Anatomy: Creation/Redemption:
Authorized
Participant
$2.5 million
ETFs,@Inc.
100K
$25
MSFT
AAPL
CSCO
CAT
IBM
ETF Anatomy: Creation/Redemption:
Authorized
Participant
100K @ $25
IBM
MSFT
ETFs, Inc.
AAPL
CAT
CSCO
ETF Anatomy: Creation/Redemption:
Authorized
Participant
50K @ $25
ETFs, Inc.
CSCO
IBM
CAT
MSFT
AAPL
Why Be An AP?
100K @ $25
Authorized
Participant
Why Be An AP?
IBM
MSFT
AAPL
CAT
CSCO
100K @ $25
Authorized
Participant
Asset Allocation of an Average1 Public Fund
ETF coverage available for every asset and sub-asset class in the portfolio
MINT
FPX
QAI
SLVY
ICF
DBC
IGOV
Domestic Equity
Domestic Fixed Income
EUSA
International Equity
Emerging Markets Equity
International Fixed Income
Commodities/Real Assets
Real Estate
VWO
Private Equity
Hedge Funds
Venture Capital
CWI
1 Simple
BND
average of asset allocation percentages of 40 public fund respondents to Council of Institutional Investors’ 2011 Asset Allocation Survey.
Cash Equivalents
Other
Cost-Efficient Transition Vehicle
Hypothetical Scenario
 $330 million emerging markets
equity allocation
 Two managers running active
strategies; Manager B has a
succession problem
 Fund wants to maintain exposure
to companies focused on
consumer goods and services in
emerging countries while seeking
a replacement for Manager B
 Manager B’s allocation is $100
million
$10 billion total portfolio
3.3% in Emerging
Markets Equity
Order Book for ECON
Source: Bloomberg, as of 9:48 a.m. on March 9, 2012
The Trade
Manager B’s Portfolio
•
•
•
•
•
•
•
Brasil Foods SA
Genting Berhad
Tiger Brands Ltd
Hyundai Motor Group
Samsung Electronics
Nan Kang Rubber Tire
Titan Industries
ECON
•
•
Dow Jones Emerging
Markets Consumer Titans
Index
Limited secondary market
liquidity (156k 30-day ADV)
Options




Liquidate stock positions and buy $100 million (4.1m shares) of ECON in the secondary market
Liquidate stock positions and buy $100 million of ECON on risk using a combination of primary
and secondary market access
Combine in-kind transition with creation process to buy $100 million of ECON1
Liquidate stock positions and buy $100 million of ECON by creating new shares through the
primary market
1 This
option is only realistic if: (a) substantial holdings overlap exists between the original portfolio and ETF and (b) the size of the trade is large enough to ensure the relative costs associated
with transferring securities is smaller than the costs associated with other trading options.
Annualized Total Cost of Ownership - $100m ECON
Expenses (in bps)
Secondary
Market
Primary
Market
Hybrid
ETF expense ratio
85
85
85
Brokerage commissions w/in ETF1
8.7
8.7
8.7
Spread on ETF shares2
16
N.A.
16
Brokerage commission on ETF
shares traded3
8.2
8.2
8.2
Creation fee (charged by ETF)4
N.A.
0.1
0.1
Up to 100
50
50
218
152
168
Estimated market impact5
Total cost
1
Calculated by taking the dollar value of commissions reported in the fund’s most recent SAI, annualizing this figure, and dividing it by estimated average assets in the fund since
inception.
2 Based on Bloomberg data on March 8, 2012. Spread was approximately $0.04.
3 Assumed a commission rate of $0.02 per share and a market price of $24.36 for ECON.
4 Most recent SAI for ECON lists a creation fee of $1,000. 82 creation units would be required to deliver 4.1 million shares (notional value of approximately $100 million) of ECON.
5 Based on Knight’s proprietary statistical trading data, which is a reflection of both real-time circumstances during March 2012 and historical market data.
The Beauty of iNAV
iNAV = Indicative (or Intraday) Net Asset Value
IOPV = Indication of Portfolio Value
IV = Indicative Value (especially for ETNs)
Yardstick for the current Bid/Ask
Estimating Fair Value
50
USD
45
40
35
30
25
Premium
Last Price
NAV
25%
20%
15%
10%
5%
0%
-5%
-10%
The Crushing Horribleness of iNAV
 iNAV’s flaws in:
 International Funds
 Bond Funds
 Commodity Funds
 and any other asynchronous things
Sometimes international markets over lap:
…But not always:
Reginald Browne
Panelist
Managing Director
Global Co-Head of the
Listed Derivatives Group
Knight Capital Group
David LaValle
Panelist
Vice President, Nasdaq
Transaction Services
NASDAQ OMX
Andrew McOrmond
Stan Ueland
Panelist
Managing Director
WallachBeth Capital LLC
Panelist
Vice President
First Trust