ETFs 201:
How To Trade
ETFs
Presenters:
GUIDO STUCCHI, CFA
Head of ETF and Index Fund
Management
THEAM
AURELIEN CRISTINI
ETF Trading, Europe
BNP Paribas CIB
On Exchange
Trading costs
Liquidity
Bid Offer spread
Transparency
Easy to trade
Premium / Discount
NAV trade
OTC
Underlying markets
Primary market
Execution
Online platforms
Depth
Broker
iNAV
Trading hours
Intraday
Flexibility
Authorised Participants
Order type
Market order
Creation / Redemption process
Market Maker
Settlement
Indices
Time zones
Order book
2
ETF combine the benefits of stocks and mutual funds
ETF
Indexed fund
—
Diversificatio
n
Stocks
—
Flexibility
Easy to trade :
real time transactions
one click one exposure
Low management fees
Low Tracking Error
Liquid
No maturity constraints
No ISDA constraints
Transparent
Highly regulated
Multiple market makers
No minimum amount required
ETF: Trading Mechanism
Hedging: Futures / Stocks / Bonds / ETFs
Stock Exchange
Bid / Offer
Price
Buy / Sell
Order
ETF shares /
Cash
Private Investors
………
& Institutional
Investors
Fund Manager
Market Maker &
Authorised Participants
Block Trade (OTC)
Institutional and Private Investors
Redemption in cash
ETF shares deleted
Subscription in cash
creation of ETF shares
Secondary Market
Primary Market
The organisation of the ETF market ensures that the ETF price is always close to its theoretical value
4
ETF vs other investment solutions
Stock
Open-ended
fund
ETF
Variable
number of
shares
Small
premiums &
discounts
Closed-end
fund
•
Trades on exchange
•
Fixed number of shares
•
Difficult to estimate
premiums & discounts vs
fair value
•
Trades at NAV (unknown)
•
Variable number of shares
•
No premium/discount
•
Trades on exchange
•
Fixed number of shares
•
Large premiums &
discounts
Trades on exchange & OTC
•
Actively-managed global equity fund listed on the London Stock Exchange
•
From March 2014 to March 2015:
Example of a closed-end fund
Example of a closed-end fund
•
Actively-managed global equity fund listed on the London Stock Exchange
•
From March 2012 to March 2013:
NAV per share =
ETF price : ETF trading price on the exchange driven by supply & demand
but always kept at fair price (otherwise arbitraged by Authorised
Participants)
iNAV (indicative NAV) : intraday value of the ETF calculated using the ETF’s
underlying securities live prices
value of assets held by the ETF – liabilities (e.g. expenses)
Number of share outstanding
ETF NAV
≠
ETF price
ETF price
underlying
Value of
assets
Arbitrage ensures ETF are fairly priced thanks to the
creation/redemption mechanism
ETF price
Value of
underlying
assets
>
AP buys underl.
securities and sells
ETF shares for a
profit
Arbitrage continues
until ETF price is in
line with the value
of underl. securities
=
Example of an ETF trading at a premium
For illustrative purpose only
ETF trading price can deviate from the theoretical value when arbitrage is
not economically viable because of:
Underlying basket friction : execution costs, taxes
Restricted markets (e.g. closed markets)
Different time zones
Increase in volatility
Discounts and premiums
Bid-Ask spread
NAV
Ask price
Bid price
Risk
premium
Hedging
costs
Redempt.
costs
Creation
costs
Hedging
costs
Risk
premium
On screen bid-ask spread is made of the best bid and best ask
quoted by Market Makers
WHERE TO TRADE ETF?
ETF =
Exchange Traded
fund, but
~
2/3 of the volume in Europe is traded OTC
- On-exchange liquidity concentrated on a few ETFs in Europe
- Well suited for advisers, retail investors
- Usually small trade sizes
- Different order types :
Market order
Limit order
Stop order…
Trading ETF on Exchange
Investor
Broker /
Platform
Stock Exchange
Example of a buy order
Places order to the SE
Provides order instructions:
-
ETF code
-
Nb of shares
-
Order type
-
More cost-efficient for large orders (above 500 K – 1 M EUR depending
on underlyings)
- Send several pricing requests for the trade to different authorised
participants (RFQ platforms)
- Different order types :
Risk price
NAV
Several block orders (VWAP: Volume Weighted Average Price)
…
Trading ETF over-the-counter
Example of RFQ platforms: Tradeweb, RFQ Hub, Bloomberg RFQ
In order to minimize transaction costs, ask advice to issuers and market
makers to work the order the best way
Liquidity risks
-
Liquidity of ETF vs liquidity of underlying
- Extraordinary or unlikely events may harm liquidity:
Technical failure (exchanges)
Event affecting the underlying market (e.g suspension)
-
Different time zones: trade as much as possible ETF when most of its
underlying basket is open
- Large order size compared to the ETF’s assets:
ask quotes for OTC trades to Market Makets, discuss holding ratio with
Portfolio Manager
- Illiquid or niche markets : internalise risk premium or trade at NAV
-
ETF enlarge the investment spectrum of retail investors by giving them access
to restricted markets (Bonds, Emerging Markets)
- The ETF ecosystem involves several parties: investors, Authorised Participants,
Market Markers, Exchanges, issuers…
- Liquidity comes from two sources: primary and secondary markets
- Different trading venues and order types depending on investment objectives
- Engage with market participants to trade efficiently
Key take-aways
How to trade ETF?
Q&A
Investment risks
•
The value of investments and the income they generate may go down as well as up and it is possible that investors will not
recover their initial outlay.
•
Interest rate risk: The value of an investment may be affected by interest rate fluctuations. Interest rates may be influenced by
several elements or events, such as monetary policy, the discount rate, inflation, etc.
•
Credit risk: This is the risk that may derive from the rating downgrade of a bond issuer to which the sub funds are exposed, which
may therefore cause the value of the investments to go down. Sub funds investing in high-yield bonds present a higher than
average risk due to the greater fluctuation of their currency or the quality of the issuer.
•
Counterparty risk: This risk relates to the quality of the counterparty with whom the management company does business, in
particular for the settlement/delivery of financial instruments or the conclusion of financial forward contracts. The risk reflects
the counterparty’s ability to honour its commitments (payment, delivery, repayment, etc.).
•
Liquidity risk: There is a risk that investments made in the sub funds may become illiquid due to an over-restricted market (often
reflected by a very broad bid-ask spread or by substantial price movements), or if their “rating” declines or their economic
situation deteriorates.
•
Derivatives risk: the use of derivatives by the funds includes various risks. Those risks are (without limitation), the lack of
secondary market liquidity under circumstances, valuations risks, the lack of standardization and regulation, the risk of leverage,
the risk of counterparty.
•
Risk linked to equity markets: the risks associated with investments in equities (and similar instruments) include significant
fluctuations in prices, negative information about the issuer or market and the subordination of a company’s equities to its bonds.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not
recover their initial outlay.
For a Complete description and definition of risks, please consult the last available prospectus and KIIDs of the funds
Disclaimer
This material is issued and has been prepared by THEAM* a member of BNP Paribas Investment Partners (BNPP IP)**. This material is produced for information purposes only and does not constitute:
1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. any investment advice .
This material makes reference to certain financial instruments (the “Financial Instrument(s)”) authorised and regulated in its/their jurisdiction(s) of incorporation.
No action has been taken which would permit the public offering of the Financial Instrument(s) in any other jurisdiction, except as indicated in the most recent prospectus, offering document or any other information material, as applicable, of the relevant Financial Instrument(s) where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of 1933). Prior to any subscription in a country in which such Financial Instrument(s) is/are registered, investors should verify any legal constraints or restrictions there may be in connection with the subscription, purchase, possession or sale of the Financial Instrument(s). Investors considering subscribing for the Financial Instrument(s) should read carefully the most recent prospectus, offering document or other information material and consult the Financial Instrument(s)’ most recent financial reports. The prospectus, offering document or other information of the Financial Instrument(s) are available from your local BNPP IP correspondents, if any, or from the entities marketing the Financial Instrument(s).
Opinions included in this material constitute the judgment of THEAM at the time specified and may be subject to change without notice. THEAM is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.
Given the economic and market risks, there can be no assurance that the Financial Instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the Financial Instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the Financial Instruments may have a significant effect on the results portrayed in this material. Past performance is not a guide to future performance and the value of the investments in Financial Instrument(s) may go down as well as up. Investors may not get back the amount they originally invested. The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes.
This document is directed only at person(s) who have professional experience in matters relating to investments (“relevant persons”). Any investment or investment activity to which this document relates is available only to and will be engaged in only with Professional Clients as defined in the rules of the Financial Services Authority. Any person who is not a relevant person should not act or rely on this document or any of its contents.
*THEAM is an investment manager registered with the “Autorité des marchés financiers” in France under number 04000048, a simplified joint stock company with a capital of 8.317.840 Euros with its registered office at 1, boulevard Haussmann 75009 Paris, France, RCS Paris 428 753 214 and is member of the Association Française de la Gestion Financière (AFG), a professional body for third-party asset management in France. www.theamfunds.com
** “BNP Paribas Investment Partners” is the global brand name of the BNP Paribas group’s asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your
ETFs 201:
How To Trade
ETFs
Presenters:
GUIDO STUCCHI, CFA
Head of ETF and Index Fund
Management
THEAM
AURELIEN CRISTINI
ETF Trading, Europe
BNP Paribas CIB