How to Trade ETFs. Presented by FA Magazine & IndexUniverse November 5, 2013

Transcription

1 How to Trade ETFs Presented by FA Magazine & IndexUniverse November 5, 2013

2 Moderator Ray Fazzi Senior Editor Financial Advisor Magazine

3 Matt Hougan President, ETF Analytics & Publications IndexUniverse Panelists Dave Nadig Unknown, Unknown IndexUniverse Ugo Egbunike Director, Business Development IndexUniverse

4 The Problem I can t buy an ETF that trades less than 100,000 shares a day! I don t want to be more than 5% of daily volume! I know I can get in, but what if I want to get out?

5 Myth 1: You Can t Trade an ETF with less than 100k shares of ADV

6 Myth 2: An ETF is As Liquid As Its Underlying

7 Elephants & Knotholes Trade Source: Bloomberg,

8 Bulls & China Shops Trade Source: Bloomberg,

9 Back to Basics: Bid/Ask Spread Sell at Bid, Buy at Ask

10 Back to Basics: Bid/Ask Spread Sell at Bid, Buy at Ask Source: IndexUniverse, as of 2/16/13

11 Different Asset Classes, Different Spreads Median Spread % All ETFs: Alternatives Asset Allocation Inverse Leveraged Currency Commodities International Fixed Income U.S. Fixed Income International Equity U.S. Equity 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% Source: Markit, as of 12/28/12

12 ETF Liquidity Explained: Bid/Ask Spread Source: IndexUniverse, as of 2/16/13

13 Market Order: Buy 1000 Shares

14 Market Order: Buy 1000 Shares

15 How Big Trades Happen in Little ETFs Creation/Redemption Refresh What Goes into an ETF Spread? ETF Arbitrage Bands Special Situations

16 How An ETF Works ETFs, Inc.?

17 ETF Anatomy: Creation/Redemption Authorized Participant $2.5 million 100K Inc. $25 CSCO AAPL CAT MSFT IBM

18 ETF Anatomy: Creation/Redemption Authorized Participant $25 100K Inc. $25 CSCO AAPL CAT MSFT IBM

19 Spread What s in an ETF Bid/Ask Spread? Ask Price Market Maker P&L ETF Spread Underlying NAV Creation Costs Forex Hedging Costs Taxes Brokerage Fees Underlying Bid/Ask Bid Price Brokerage Fees Taxes Forex Hedging Costs Redemption Fees Market Maker P&L Source: SSgA.

20 ETFs Should Trade Within Their Arbitrage Bands Most of the Time Source: Fox River Execution. Data as of 12/1/09.

21 Difficulty ETF Trading: It s Hardest In The Middle Size of Order

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24 0.50% Issue: When to Trade IGV vs. Underlying 0.40% 0.30% 0.20% 0.10% 0.00% 9:30 AM 10:00 AM 10:30 AM 11:00 AM 11:30 AM 12:00 PM 12:30 PM 1:00 PM 1:30 PM 2:00 PM 2:30 PM 3:00 PM 3:30 PM IGV Spread Weighted Avg. Spread of Underlying Holdings Source: Bloomberg, as of 10/19/12

25 Issue: Market Impact Ticker Fund Name Avg. Spread Median Volume (40 Day) Underlying Volume/Creation Unit FDM First Trust Dow Jones Select MicroCap Index Fund 0.21% 4, % WMCR Guggenheim Wilshire Micro-Cap ETF 0.71% 1, % IWC ishares Russell Microcap 0.07% 66, % PZI PowerShares Zacks Micro Cap Portfolio 0.24% 5, % Source: IndexUniverse, as of 2/16/13

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28 Issue: Fair Value - SPY vs. inav $ $ $ $ $ $ /30/2013 9:30 2/4/ :00 Last Price inav Source: Bloomberg, as of 2/4/13

29 Issue: Fair Value - GXC $70.50 $70.00 GXC Price $69.50 $69.00 $68.50 $68.00 $67.50 $67.00 GXC inav 1/18/12 8:00 AM 1/30/12 4:27 PM Source: Bloomberg, as of1/30/12

30 Issue: Premiums/Discounts - EGPT Egyptian Stock Exchange closes January 27, 2011 Exchange reopens March 23, Protests begin January 25, Mubarak resigns February 11, Source: Bloomberg, as of 03/31/11

31 Issue: Premiums/Discounts - TVIX 20 Price NAV 11:10amEST: TVIX premium reaches almost 100% Credit Suisse halted creations on the VelocityShares Daily 2X VIX Short ETN, TVIX ETN placed on threshold list 7:42pmEST: Credit Suisse issues press release announcing re-opening of the ETN February 22, 2012 March 20, 2012 Source: Bloomberg, as of 03/31/12

32 % Premium/Discount Issue: Premiums/Discounts - TLT 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% -0.20% -0.40% -0.60% -0.80% 12/30/ /31/2012 Source: Bloomberg, as of 12/31/2012

33 % Premium/Discount Shares Outstanding (Thousands) Issue: Premiums/Discounts - HYG 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% % /14/ /13/2012 %Premium Shares Out Source: Bloomberg, as of 11/14/12

34 Executing Trades: Practical Strategies

35 Reality: Trading is Complicated Three Types of Trading for Advisors: Entirely Self-Directed Internally Assisted Trade Away

36 Self Directed: Level 2 Source: Bloomberg, as of 2/19/13

37 Internally Assisted Wide range of service levels Provide basic execution advice Enforce blacklists Source liquidity externally Work larger trades Pros: Little information leakage, liquidity access, expertise Cons: Accountability and Best Execution not guaranteed

38 Trading Away Types of Firms Market Makers / Authorized Participants Knight Capital Group Susquehanna International Group Agency Brokerages WallachBeth ConvergEx

39 AP/Market Maker Trade Date: January 30, For illustrative purposes only Source: Goldman Sachs, as of 1/20/13

40 Agency Brokerage Give me your best bid and offer!

41 Executing Brokers Sample APs Largest ETF trader in the world Handles all ETFs Heavily focused on trading technology Institutional liquidity provider now targeting advisors Heavy focus on fixed income Willing to work with captive customers White-glove service Support of full firm s resources Ability to trade on risk or in multiple manners

42 Executing Brokers Sample APs Specializes in derivatives, European equity ETFs Excellent technology and hedging capabilities Focusing on advisors Heavy focus on fixed income Strong liquidity provider outside of market hours Doesn t have customers A market maker s market maker

43 Executing Brokers Agency Brokers Lead the charge of agency brokers Growing quickly and covers all ETFs Doesn t do business with Knight Subsidiary of Wolverine Broker neutral Technology driven Bank of New York company Willing to support any ETF Growing technological platform

44 Every Issuer Can Facilitate Liquidity Optimizing Baskets Customized Baskets Accepting Cash in Lieu Tightening Up Onscreen Spreads Recommending Where to Route Trades

45 Thank You. Questions?