Fair Transport Europe” ETF vision for the future of European Transport
What is an Etf s Fair Value
Transcript of What is an Etf s Fair Value
-
8/12/2019 What is an Etf s Fair Value
1/22
Whats An ETFsFair Value?
Dave Nadig, Moderator
Director of Research, IndexUniverse
Robert Rushe, Panelist
Head of ETF Servicing, Ireland
State Street Global Services
Matt Holden, Panelist
Head of ETF Trading, Europe, Knight Capital Group
Samu Lang, Panelist
Investment Director, Partner, Global Asset Allocation
Taaleritehdas Asset Management Ltd.
Kris Walesby, Panelist
European Head of Capital Markets
ETF Securities
-
8/12/2019 What is an Etf s Fair Value
2/22
Robert RusheHead of ETF Servicing, IrelandState Street Global Services
ETF Values:The Basics
-
8/12/2019 What is an Etf s Fair Value
3/22
ETF Value vs. Equity Value
ETFs do not price like equities
Value is based on balance sheet only
Unlimited number of shares on issue
No price squeeze
-
8/12/2019 What is an Etf s Fair Value
4/22
Spreads
Lack of on exchange liquidity may not result in
higher spread
Spread limited by the cost of creation/redemption
Multiple creation/redemption models used
-
8/12/2019 What is an Etf s Fair Value
5/22
The Value of iNav
iNAV shows current estimate NAV value of fund
based on real-time pricing data
Only shows last traded value. No bid/ask spread.
Only updates when underlying markets are open
Calculation methodologies can differ
-
8/12/2019 What is an Etf s Fair Value
6/22
Know the Product
Knowledge of specific ETF is key to best execution
Primary Market Dealing model & Cost
Underlying pricing timelines
Most active Market Makers for specific product
-
8/12/2019 What is an Etf s Fair Value
7/22
Market Makers,
Arbitrage and
Creations
Matt HoldenHead of ETF Trading Europe
Knight Capital Group
-
8/12/2019 What is an Etf s Fair Value
8/22
What Triggers an Arbitrage Trade? Assess the iNAV you are using is accurate
Most market makers calculate iNAV directly or via a proxy calculation Use the published iNAV either as your iNAV or as a check
Understand or assess the cause of any premium or discount
Does the live market greatly vary from your iNAV...if so, why?
Envisage the unwind or exit point of the trade and ensurethis is priced in
Does the fund have a fluid create/redeem process or is it limited and
restrictive?
Can you shift your hedge into the fund easily or is a proxy hedge
more efficient?
Is there enough secondary market flow in the fund to exit via
another trade?
-
8/12/2019 What is an Etf s Fair Value
9/22
Assessing if an iNAV is Accurate
iNAVs can be a useful tool for assessing an ETFs fair value...but beware!
Some key questions one should ask with respect to an iNAVs accuracy:
Do the underlying assets price transparently?
Equities are most transparent
Bonds are less transparent
Are the assets part of a single market or listed under a single currency?
Single currency and single market has less room for error
Multiple currencies, regions and markets can be error prone
Does the calculation involve a proxy setting for regions
that are not open? Is the iNAV independently calculated by an exchange or
a market data provider?
-
8/12/2019 What is an Etf s Fair Value
10/22
-
8/12/2019 What is an Etf s Fair Value
11/22
Effects on the Spread or Cause of Prem/Disc
The Achievable Spread is affected by several factors and liquidity pools.
OutrightMarket Makers
Options Trading
High Frequency
Trading
Hedging
Strategies
Investment
ManagersRetail Investors
Proxy Arbitrage
Market Makers
Pure Arbitrage
Market Makers
Achievable
Spread
Removing or increasing the influence ofany of these factors will increase spread
or shift the spread to premium or
discountUpper Fair
Value Offer
Upper Fair
Value Bid
Achievable
Spread either widens or
shifts in the range
to premium or
discount
-
8/12/2019 What is an Etf s Fair Value
12/22
Whats the Costof an ETF?
Samu Lang
Investment Director, Partner,Global Asset Allocation
Taaleritehdas Asset
Management Ltd.
-
8/12/2019 What is an Etf s Fair Value
13/22
-
8/12/2019 What is an Etf s Fair Value
14/22
REAL CASE: iShares Euro High YieldMost of the time trades at a premium! Why?
Index constituents priced @ bid
Creation cost NAV +150 bp (redemption NAV -25 bp)
What other factors influence the premium?
Flow direction
Market maker hedging costs
-
8/12/2019 What is an Etf s Fair Value
15/22
101,4
101,6
101,8
102,0
102,2
102,4
102,6
102,8
103,0
8:38:24 9:36:00 10:33:36 11:31:12 12:28:48 13:26:24 14:24:00 15:21:36 16:19:12 17:16:48 18:14:24 19:12:00
BID ASK INAVHYGE Index
4.4.2012 Sell IHYG LN 40419 units
Factors were looking at: NAV and INAV vs. quoted BID (on screen & OTC)
Consolidated tape / cross -exchange quotes
Itraxx Crossover intraday
Calculating INAV reliably is difficult at least for us !
Order placed with our trader
Order filled
12 793 on screen @ 102,23 27 626 OTC risk price @ 102,11
Average 40 419 @ 102,15
-
8/12/2019 What is an Etf s Fair Value
16/22
4.4.2012 Sell IHYG LN 40419 units
Total proceeds 4,13 meur (40419 @ 102,15 )
NAV 4.4.2012 100,97 (cut-off 14.00 GMT)
After issuer redemption fee (25bp) net price for NAV
order 100,72
Loss if sold @ NAV => 57 718 !
Be carefull when trading fixed income ETFs
Know at least how the Underlying index and ETF arevalued and the creation/redemption costs associated
with NAV+ funds
-
8/12/2019 What is an Etf s Fair Value
17/22
Fair Value In
Relation ToCommodities
ETP Trading
Kris WalesbyEuropean Headof Capital Markets
ETF Securities
-
8/12/2019 What is an Etf s Fair Value
18/22
Proxy Hedge Fair Value For many commodity products there is continuous pricing on the underlying
However what happens when this is not the case? Proxy Hedges
Cocoa and Coffee futures are closed during the beginning of European trading
Cocoa opens at 9am UK time
Coffee opens at 8:30am UK time
During that period market makers will use the prices of cotton and sugar as aproxy hedge
Also market makers can interpolate un-open components from broad baskets
e.g. All Commodities
Result Market makers will widen spreads to compensate for the risk of
proxy hedging
-
8/12/2019 What is an Etf s Fair Value
19/22
-
8/12/2019 What is an Etf s Fair Value
20/22
-
8/12/2019 What is an Etf s Fair Value
21/22
Agricultural commodities on CME
13:15 15:30 UK time underlying markets are closed
There is a rolling auction as a reference but the price is not a good basis forfair value because the orders driving the auction can be cancelled
Therefore the best proxies become the ETPs themselves
Also, there are some futures on NYSE Euronext that can be used forhedging too
ETP Pricing
Sometimes The Best Indication Of Fair Value
-
8/12/2019 What is an Etf s Fair Value
22/22
Whats An ETFsFair Value?
Dave Nadig, Moderator
Director of Research, IndexUniverse
Robert Rushe, Panelist
Head of ETF Servicing, Ireland
State Street Global Services
Matt Holden, Panelist
Head of ETF Trading, Europe, Knight Capital Group
Samu Lang, Panelist
Investment Director, Partner, Global Asset Allocation
Taaleritehdas Asset Management Ltd.
Kris Walesby, Panelist
European Head of Capital Markets
ETF Securities