Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: How about this, party people – Listerine was originally invented 135 years ago to cure gonorrhea. And then forty years later it became a mouthwash. True story. Regards, Ted http://thereformedbroker.com/2018/02/12/passive-my-a/
Outflows amounted to 8 percent of the fund’s total assets at the start of the week, a rate of withdrawals not seen since August 2010. The five-session stampede for the exits erased the previous nine weeks of inflows into the fund, which is issued by State Street. The combination of price declines and withdrawals erased $38.6 billion in SPY’s assets. That’s nearly double the second-worst showing of $19.4 billion in asset shrinkage during the week ending Aug. 21, 2015.
This outflow amounts to program selling. VIX spiked up widely in last two weeks.
Individual investors are by far the largest holders of the Vanguard [traditional index funds], with annual redemption rates in the range of 8 per cent of assets. Banks and financial intermediaries hold almost 90 per cent of SPDR S&P 500, where the dollar value of annual turnover typically runs to some 3,000 per cent of assets
The only way an ETF can have an outflow is if authorized participants (APs) redeem shares. Otherwise, investors are merely trading among themselves, neither buying new shares nor redeeming existing shares.
APs act only if there is significant tracking error between the ETF price and the underlying portfolio value. For example, when the market is rising, but buyers aren't rushing to buy the ETF, the ETF price may lag. APs will swoop in and buy "cheap" (rising but underpriced) ETFs, redeem them, and then sell the underlying stocks at a profit.
So rapid outflow (redemptions by APs) could be caused by lack of ETF trading, just as it could be caused by excessive trading (e.g. pushing the ETF price down below the underlying portfolio's "true" value). A direct causal relationship between ETF outflow (i.e. AP redemptions) and ETF trading volume doesn't seem clear to me.
Regarding the "active" use of ETFs, Bogle looked at how owners of Vanguard index funds did during a few months of 2016. He wrote that if the investors bought a fund via ETF shares, they underperformed by around 1.6% over the period examined. But investors who bought the same fund via open end shares slightly outperformed the fund.
He wrote that if the investors bought a fund via ETF shares, they underperformed by around 1.6% over the period examined. But investors who bought the same fund via open end shares slightly outperformed the fund.
@msf, Agree. Underperforming by 1.6% is sizable. Long holding period, i.e. 10 years or so may reduce the difference. By the same token, what is the point of ETFs other than ease of trading?
For most of us “ease of trading” is not necessarily a virtue. Unless you are very astute at the game and very well informed, there’s a distinct possibility of shooting yourself in the foot (or worse). Remember always that you’re playing against sharks and that the field is seldom level.
Not an argument for high-priced actively managed funds or for buy and die. Just saying that there are good actively managed and passively managed funds to be had without the temptation / ability to trade in and out often.
What Is an AP? An AP is typically a large financial institution that enters into a legal contract with an ETF distributor to create and redeem shares of the fund. APs play a key role in the primary market for ETF shares because they are the only investors allowed to interact directly with the fund. ...
You're correct that there is some risk for APs. On the other hand, while they're allowed to make money via arbitrage (e.g. buying an ETF for less than the value of its components and then selling the underlying securities), they are not required to participate.
In theory you could have an ETF where no AP stepped in to stabilize its market price (relative to its NAV). ICI seems to think this isn't a big deal. Some people here, myself included, might disagree. In its paper, ICI writes:
It is important to remember that even if no APs ...step forward to create and redeem [ETF shares], the affected ETF shares would ... trade like closed-end funds. In addition, the effects would [be] contained to the affected ETFs and not transmitted to other ETFs or the underlying securities markets
The distributor creates shares for the AP, just as a retail fund distributor creates shares for us peon investors.
A difference is that the AP pays in-kind with the underlying securities, rather than with cash. Another difference is that APs buy in bulk (lots of shares in a single creation unit). A third difference is that APs pay a fee to the distributor for the service of creating the shares and handling the underlying securities.
(Some more esoteric ETFs especially ones involving derivatives are often purchased by APs with cash.)
Comments
Jack Bogle: the lessons we must take from ETFs (FT, Dec 11, 2016) The only way an ETF can have an outflow is if authorized participants (APs) redeem shares. Otherwise, investors are merely trading among themselves, neither buying new shares nor redeeming existing shares.
APs act only if there is significant tracking error between the ETF price and the underlying portfolio value. For example, when the market is rising, but buyers aren't rushing to buy the ETF, the ETF price may lag. APs will swoop in and buy "cheap" (rising but underpriced) ETFs, redeem them, and then sell the underlying stocks at a profit.
So rapid outflow (redemptions by APs) could be caused by lack of ETF trading, just as it could be caused by excessive trading (e.g. pushing the ETF price down below the underlying portfolio's "true" value). A direct causal relationship between ETF outflow (i.e. AP redemptions) and ETF trading volume doesn't seem clear to me.
Regarding the "active" use of ETFs, Bogle looked at how owners of Vanguard index funds did during a few months of 2016. He wrote that if the investors bought a fund via ETF shares, they underperformed by around 1.6% over the period examined. But investors who bought the same fund via open end shares slightly outperformed the fund.
Not an argument for high-priced actively managed funds or for buy and die. Just saying that there are good actively managed and passively managed funds to be had without the temptation / ability to trade in and out often.
Here's a sample AP agreement I pulled up at the SEC site. (I've never read one of these, have no desire to; a quick skim of the headings suggests this agreement is pretty basic.)
https://www.sec.gov/Archives/edgar/data/1414040/000119312513132740/d513469dex99e2.htm
For a more complete answer, here's ICI's "The Role and Activities of Authorized Participants of Exchange Traded Funds".
https://www.sec.gov/Archives/edgar/data/1414040/000119312513132740/d513469dex99e2.htm You're correct that there is some risk for APs. On the other hand, while they're allowed to make money via arbitrage (e.g. buying an ETF for less than the value of its components and then selling the underlying securities), they are not required to participate.
In theory you could have an ETF where no AP stepped in to stabilize its market price (relative to its NAV). ICI seems to think this isn't a big deal. Some people here, myself included, might disagree. In its paper, ICI writes:
A difference is that the AP pays in-kind with the underlying securities, rather than with cash. Another difference is that APs buy in bulk (lots of shares in a single creation unit). A third difference is that APs pay a fee to the distributor for the service of creating the shares and handling the underlying securities.
(Some more esoteric ETFs especially ones involving derivatives are often purchased by APs with cash.)