Illiquid securities?

hank

I have made 3 very small purchases this week into an etf that opened in May and has an AUM under 4M. All were attempted for specific $$ amounts “at market”. Twice Fido posted a message (roughly stated): “Fidelity does not purchase illiquid securities. Please enter a limit order.”. I initiated a limit order and the trade went through quickly. But, interestingly, on the 2nd order (out of the 3) they put it through for the set $$ amount “at market”. The fund is GLDB - a weird blend of gold and corporate bonds which I’m sure nobody else would want to own.

- Question: Is it probable the reason for the designation of “illiquid” is based on the small AUM and a relatively small number of shares currently changing hands?

- Another detail: In reading the prospectus I came across something of a disclaimer stating that shares do not trade at NAV but that NAV is calculated at the end of each reading day. Is this typical of ETFs?

- The fund pays monthly interest & as with all my funds I’ve selected the “reinvest” option. It appears to be in effect. But I’m thinking they may not actually be able to reinvest the proceeds at market value if the fund is still considered “illiquid.” In that case, I’m confident the $$ will go into my core account. Might be a struggle reinvesting “chump change” into full or fractional shares?

Mark

If your distributions are large enough to purchase at least 0.001 shares then that's what they will do. If not, they may just deposit the distribution funds into your core account. You might want to give them a call or open a chat online to confirm.

hank

Let us hope.

carew388

Hank Same thing happened to me with TBUX at Fido. I was able to buy it later at Schwab but the small volume bothered me, so I sold. Normally I would think etf NAV's change continually like SPY or QQQ. GLDB trades less than 2,000 shares daily, so Fido freaks out about this. I'll find out Monday about MRGR (10,000 share volume) when I put my buy order in.

hank

Thanks @carew388. I remember your experience and was wondering if mine was similar. Yes - I can understand where with TRBUX, which is supposed to be highly liquid & immediately available to deploy, that would be an issue.

As far as GLDB goes … Fido showed the bid and offer prices when I begin to transact. So I understood the situation. ISTM I did sacrifice 10 cents per share (the bid prices were lower than the ask prices). Not much of an issue for me. Yes - I’m sure it’s lightly traded!

PS - What’s curious is I was able to get one of the 3 buys (the middle one) to go thru at “market.” So this liquidity gig must vary from hour to hour depending on flows.

msf

If a tree falls in a forest but nobody hears it, does it make a sound?

I would think etf NAV's change continually like SPY or QQQ.
If an ETF's holdings have instantaneous values but nobody adds them together moment by moment, does it have intra-day NAVs?

From SPY's prospectus:
"The trading prices of the Trust’s Units will fluctuate continuously ... based on market supply and demand rather than the Trust’s NAV, which is calculated at the end of each Business Day.

NAV is calculated at the end of each reading day. Is this typical of ETFs?

Yes. From BlackRock:
" The market price is different to an ETF’s NAV which shows the official value of the ETF once a day, based on the closing prices of the underlying securities."
https://www.ishares.com/ch/individual/en/education/etf-pricing-and-valuations

shares do not trade at NAV
They trade at typically small premiums or discounts to (intraday) NAV. How small a difference depends on liquidity of the underlying securities and to some extent the trading volume of the ETF itself.

From Vanguard's Understanding ETF liquidity and trading:
"Although trading activity and market depth on the stock exchange contribute to an ETF’s secondary market liquidity, most of an ETF’s liquidity comes from its underlying securities"
https://www.vanguardinvestments.dk/documents/understanding-etf-liquidity.pdf

catch22

Changing NAV's.
I periodically view a watch list I have set, at Google Finance, and "see" the changing NAV's throughout a trading day.

Remain curious,
Catch

carew388

+1 msf I confused nav with market price. Thanks

BaluBalu

Is not the intra day indicative value shown on the quote page at M* the presumed NAV of an ETF?

Mark

I don't believe so. Rather it's the price the last recorded trade was conducted at according to whatever data feed they are using.

msf

The IIV (intraday indiciative NAV) is just that, indicative, not necessarily an accurate calculation of the current NAV. First, because it is usually calculated only four times a minute, so the value can be somewhat stale. More interestingly, it may not be accurate because it is calculated on something other than the precise instantaneous holdings in the portfolio.

It may be calculated based on yesterday's ending portfolio. That is, for example, the way Precidian Active Shares provide what they call a verified IIV (VIIV).

[T]he custodian on behalf of the fund will share the end of day NAV portfolio (NAVP) with an independent valuation agent. Rather than publically disclosing portfolio composition, the valuation agent will calculate and disseminate a Verified Indicative Intraday Value (VIIV) at one-second intervals the following day based on the NAVP

https://www.sec.gov/Archives/edgar/data/1499655/000114420419018151/tv518160_40-appa.htm

More customarily, the calculation, still performed by third parties, is based on daily creation baskets. The issue here is that creation baskets often do not precisely replicate what is in the portfolio.

In certain cases (e.g., some fixed income ETFs), the creation or redemption basket might contain different combinations of securities and/or cash relative to the overall ETF portfolio

https://www.sec.gov/Archives/edgar/data/1499655/000114420419018151/tv518160_40-appa.htm

It gives one pause to consider that an ETF might specify baskets for creating and redeeming shares (by authorized participants) that don't match. (This can be used as a mechanism for changing the holdings of an ETF.)

"The composition of the redemption basket typically mirrors that of the creation basket." But it doesn't have to.
http://www.understandetfs.org/creation_redemption.html

yogibearbull

As @msf noted, intraday indicated values (IIV) may be for creation/redemption baskets. With refresh every 15 sec, how stale that data can be?

Note that Precidian ETFs and several others are the newer active nontransparent ETFs. These have different portfolio disclosure rules than those for passive/indexed ETFs (95-96%?).

msf

That 15 second delay was enough for the SEC to reject Precidian's original (2014) application for nontransparent ETFs:

The IIV is stale data. Unlike market maker proprietary algorithms, which rely on portfolio transparency and provide market makers with real-time data to effectively trade in today’s fast moving markets, IIV dissemination frequency is inadequate for purposes of making efficient markets in ETFs.27 Market makers operate at speeds calculated in fractions of a second.28 In today’s markets, 15 seconds is too long for purposes of efficient market making and could result in poor execution.29 Because an ETF is a derivative security, its current value changes every time the value of any underlying component of the ETF portfolio changes.30 Therefore, the IIV for a more frequently traded component security might not effectively take into account the full trading activity for that security, despite being available every 15 seconds.

For example, a large buy order for a component security held by the proposed ETF could temporarily spike the price of that security and, therefore, inflate the proposed ETF’s contemporaneous IIV calculation. 31 The IIV for the proposed ETF cannot adjust for such variations, whereas the NAV would.32 Therefore, relying on a stale IIV as a primary pricing signal for market making in Applicants’ proposed ETFs would not result in an effective arbitrage mechanism. 33

https://www.sec.gov/rules/ic/2014/ic-31300.pdf (footnotes omitted)

hank

ISTM that ETF’s occupy something of a “gray area” between traditional open end funds and closed end funds. Both ETFs & CEFs trade actively at prices determined by the market participants. Also, ISTM the heavy reliance of GLDB on derivatives / futures contracts must make calculating NAV precisely on a daily basis more difficult than simply “adding up the value of the underlying assets.” (my words). Since many open ended funds also use derivatives, they also face this issue.

Investopedia attempts to describe key differences between ETFs and CEFs. https://www.investopedia.com/ask/answers/052615/what-difference-between-exchange-traded-funds-etfs-and-closed-end-funds.asp


PS - Unless the forest was completely devoid of man, beast or fowl when said tree fell, there should have been sound. In any case, the sound waves are still echoing somewhere …

BaluBalu

I get that you guys are trying to be intellectually precise but how does one use that information? 15 seconds is real time enough for NAV for me. I make so many poor choices in a day that have nothing to do with stale data, I am not sure having more current information on NAV would improve my yearly portfolio performance. E.g., it takes me more than 15 seconds to put a trade through Vanguard brokerage.

hank

BaluBalu said:

I get that you guys are trying to be intellectually precise but how does one use that information?

I sort of agree. ISTM either a body is liquid or it is frozen. There’s not much in between. Why finesse the issue?

msf

BaluBalu said:

how does one use that information?

That's an excellent question. Regardless of the quality of the data, how does a retail investor make use of an IIV? Only an authorized participant (AP) can trade on the difference between the actual NAV (or IIV) and the ETF market price. Retail investors can only trade on the current market price.

Say that the market is rising rapidly, and in anticipation traders are bidding up an ETF's price even more quickly. So the ETF is priced at a small premium. As a retail investor interested in buying the ETF, are you going to hold off until that premium vanishes (assuming you're even looking at the IIV)? Or are you going to buy the ETF now before the price shoots up some more?

What is a possible scenario where a retail investor changes a buy/sell decision for an ETF based on its IIV? If it makes a difference, assume whatever you need about how current the IIV figure is.

ISTM that only APs care about the actual value of an ETF portfolio as opposed to what an ETF is selling for on the open market. That's so they can arbitrage the difference. For them, 15 seconds isn't good enough - they run their own internal calculations.

BaluBalu

A bit of off topic but there is usefulness to ETFs’ discount / premia information. For example, I am more inclined to buy an ETF (usually, at a discount) than the equivalent OEF in a cratering market. Excessive premia is another data point in my sell decision. But intraday NAV info is not something I have managed to use. May be if I invested in active ETFs, I would have a different take on intraday NAV.