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ETFs 201: How To Trade ETFs. AURELIEN CRISTINI ETF Trading, Europe BNP Paribas CIB. GUIDO STUCCHI, CFA Head of ETF and Index Fund Management THEAM

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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

(2)

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

(3)

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

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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

(5)

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

(6)

Actively-managed global equity fund listed on the London Stock Exchange

From March 2014 to March 2015:

Example of a closed-end fund

(7)

Example of a closed-end fund

Actively-managed global equity fund listed on the London Stock Exchange

From March 2012 to March 2013:

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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

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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

(10)

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

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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

(12)

WHERE TO TRADE ETF?

ETF =

Exchange Traded

fund, but

~

2/3 of the volume in Europe is traded OTC

(13)

- 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

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-

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

(15)

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

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-

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

(17)

How to trade ETF?

Q&A

(18)

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

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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

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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

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