Trading Exchange Traded Funds

Transcription

1 For Professional Investors Only. Not for onward distribution Trading Exchange Traded Funds Aidan Hsu Nov 9 th, 2011 For Professional Investors Only Not for onward distribution

2 Topics of discussion Liquidity What does it mean and when does it matter Pricing NAVs, INAVs and proxy pricing Execution Options for trading ETFs ETF Trading Tips Important facts to consider and what to avoid Settlements and Lending Fragmentation of the European Market and limited borrow availability Q&A Date 09/11/2011 Slide 2

3 Liquidity Fragmentation of European Markets European ETF on exchange turnover is roughly 10% of European cash equities European OTC activity comprises 40%-60% of total ETF activity Most European ETFs are not covered under MiFid for trade reporting. This may change under MiFid II Fragmented market Multiple issuers of similar funds Multiple listings in multiple currencies that may not be fungible Issuers in Europe promoting NAV trades which potentially reduces liquidity NAV trades are very rare in the US Source: Credit Suisse, Bloomberg Finance LP, Reuters Nov 2011 Date 09/11/2011 Slide 3

4 Primary Market Creation / Redemption process Securities or Cash Authorised Participant (AP) Cash Primary Market ETF Issuer Create/Redeem in primary market Trade in the secondary market Client ETF ETF Cash ETF Secondary Market On Exchange or OTC Date 09/11/2011 Slide 4

5 Liquidity Source of Liquidity of ETFs ETF liquidity is a function of the basket of securities it tracks Primary Market Authorized Participants (APs) can create and redeem ETFs in exchange for underlying securities or cash Primary Market restrictions Creation/redemption process can be costly and operationally intensive Primary market sizes can be restrictive Cash trades can be limited to the close Secondary market As a fund s AUM grows there is naturally more liquidity on exchange and OTC Credit Suisse s AES Liquidity Transformer ETF Algo New trading algo that sources liquidity from the ETF, Future and cash basket Date 09/11/2011 Slide 5

6 Advanced Execution Services ETF Liquidity Transformer Combined order book with Synthetic ETF prices ETF BEST BID Future Future Basket BEST OFFER ETF Basket Date 09/11/2011 Slide 6

7 Pricing of ETFs Official Closing NAV, Indicative NAV and the PCF OC NAV is published by ETF issuer Indicative NAV is published by third party agent Portfolio Composition File (PCF) issued by provider Calculating an ETF fair value using proxy pricing Each Market Maker will have their own proprietary methods for calculating a fair value Each pricing model will have a degree of uncertainty Quoted price will depend on Liquidity and market impact in the ETF secondary market Liquidity and market impact of the underlying securities Cost and variance of hedging Primary Market costs Date 09/11/2011 Slide 7

8 CSEM CS MSCI Emerging Markets example Source: Credit Suisse, Weightings as at 08/11/2011 Pricing CSEM during the European Day Weighting Country State 16.9% Hong Kong Closed Starting level What markets are open/ closed What models to use Broader market considerations What flow to consider Inventory considerations/ Primary market costs Hedging costs Economic releases 14.7% Korea Closed 10.7% Taiwan Closed 3.1% Malaysia Closed 2.9% Indonesia Closed 2.1% Thailand Closed 7.2% Indian ADRs Closed but locals open 8.8% Russian GDRs Open 7.8% South Africa Open 1.2% Turkey Open 1.1% Russia Local Open 3.7% EMEA Open 15.3% Brazil Closed 4.7% Mexico Closed Source: Credit Suisse, Bloomberg Finance LP, Reuters Nov 8, 2011 Date 09/11/2011 Slide 8

9 Trading ETFs Execution Options Market Risk FX Risk Impact Comparable NAV Exposed until next NAV is struck Exposed until next NAV is struck Depends on market and benchmark Transparent Risk Transferred at time of trade Transferred at time of trade Implied in price Transparent Agency Exposed until completion of trade Exposed until completion of trade Depends on execution broker Difficult Market on Close Exposed until close Exposed until close Depends on execution broker Difficult Date 09/11/2011 Slide 9

10 ETF Trading Tips Consider period of holding Trading costs vs. holding costs Find the liquidity Find the most liquid ETF tracking the index Trade the liquid listing Consider any premium when trading an ETF NAV trades Get quotes early in the day Avoid Market on close VWAP or TWAPs in illiquid ETFs Market orders especially in illiquid ETFs Leaving orders in market or trading during economic releases Be discreet with large orders Date 09/11/2011 Slide 10

11 ETF Premium example Consider the premium when choosing and trading an ETF ISF LN (ishares FTSE 100) Physical fund 50bps of UK stamp duty incurred on creations Source: Credit Suisse, Bloomberg Finance LP Nov 2011 Past Performance is not an indication of Future Performance Date 09/11/2011 Slide 11

12 ETF Settlements and Borrow Fragmented Markets Multiple Listings Multiple currencies Multiple CSDs Conversions can be operationally intensive Settlement time differences European Markets are mostly T+3 (Germany t+2) Creations can be T+ 4 or longer Fund Holidays Cut off times can be early in the day Limited borrow available Average rates of 2% but can be up to 6%+ for less liquid names Circular effect of supply and demand Risk of exchange buy ins Create to lend can be expensive Date 09/11/2011 Slide 12

13 Create to Lend - SX5E ETF example Gross to Net Divs Acc TER (35bps) 5 Acc Stock Borrow (40bps) Creation/Redemption Costs (2bps) 0 Acc ETF rate (5.63%) 5 01/04/ /04/ /04/ /04/ /04/ /05/ /05/ /05/ /05/2012 Daily PnL Accumulated PnL Source: Credit Suisse, Bloomberg Finance LP Nov 2011 Backtested, hypothetical or simulated performance results have inherent limitations. Simulated results are achieved by the retroactive application of a backtested model itself designed with the benefit of hindsight. The backtesting of performance differs from the actual account performance because the investment strategy may be adjusted at any time, for any reason and can continue to be changed until desired or better performance results are achieved. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor a guarantee of future returns. Actual results will vary from the analysis. Source: Credit Suisse, Bloomberg Finance LP Nov 2011 Date 09/11/2011 Slide 13

14 Q&A Thank you For Further information on trading all European ETFs including Equity, Fixed Income and Commodities please contact ETF trading +44 (0) Aidan Hsu Rohit Jha Paul Bermingham ETF Marketing +44 (0) Keith Shea Alex Bentall Peter Douglas Date 09/11/2011 Slide 14

15 IMPORTANT INFORMATION AND DISCLAIMERS Credit Suisse Securities (Europe) Limited ("CSSEL") is authorised and regulated by the Financial Services Authority. This material has been prepared by sales and / or trading employees at CSSEL or its subsidiaries or affiliates (collectively Credit Suisse) and not by Credit Suisse's Research Department. This material is provided directly to professional and eligible counterparties for informational purposes only and is not intended for retail clients as defined by the UK Financial Services Authority. This material is not for distribution and is intended for the direct recipients use only. This material does not constitute investment research or investment advice and should not be viewed as a personal recommendation, invitation or offer to subscribe for or purchase any of the products or services mentioned or to make any investment decisions or adopt any investment strategy described in this material or otherwise. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance. Opinions and estimates may be changed without notice. The information provided in this material is intended only to provide observations of CSSEL analysts or other CSSEL sales and / or trading employees, which may be different from, or inconsistent with, the observations of Credit Suisse Research Analysts or proprietary positions. Observations expressed herein reflect a judgment as of the date of publication of this material and may be changed at any time without notice. No representation or warranty expressed or implied is made regarding this material, although it has been obtained from or based upon sources believed by CSSEL to be reliable. Information provided herein and not specifically sourced has been gathered from publically available sources which CSSEL believes to be correct but CSSEL does not represent or warrant the accuracy or completeness of any of the information contained herein and is not responsible for any losses, claims or damages arising out of errors, omissions or changes in market factors. This material does not purport to contain all information required to make an investment decision and provides only a limited view of a particular market. Clients should seek professional tax, legal or investment advice prior to making any investment decision. CSSEL may engage in transactions with, perform services for, solicit business from, have a financial interest in, effect transactions with or have other business relationships with the companies referred to in this material and their affiliates. Copyright 2011 Credit Suisse AG and/or its subsidiaries and affiliates. All rights reserved. Date 09/11/2011 Slide 15