A Quick Introduction to Exchange Traded Funds

Invited talk at Judge Business School Cambridge in April 2016, updated for University of Belgrade, May 2016

Transcript

1. Investicione metode za narodne mase Dr Drago Indjic ETFmatic Ekonomski fakultet, Beograd, 13. V 2016
2. Exchange Traded Products (ETF-matically) Dr Drago Indjic ETFmatic JBS Cambridge, 26 April 2016
3. Saradnja sa maticom • Akademska – Novi Sad: J. Njegić – Kragujevac: M. Drenovak, V. Ranković – Beograd: I. Janković, M. Božović • Privredna – Beograd: tp.rs • Dobrotvorna – Petnica
4. ETF Gamification • Q1. ETF • http://www.londonstockexchange.com/global/portfolio /portfolio-and-trading-simulator.htm • https://etfmatic.com/start-now • Q2. Estimate required size of pension pot • Glide path, benefit insurability, cumulative cost: • Please write down your Q’s for Q&A • How many more fund products do we need?! At what cost? How about 1/30th of the current cost?
5. Contents • Supply: Exchange Traded Products (7 slides) – MiF level: case study + investment strategies • Demand: Fund management – Products, services, market and economics; • Packaging, features, costs and value of (staple, commoditised and luxury) investments – Delegated investment management • UK plc fintech terroir. Beats NY.
6. Retail Investment Products • Advisory gap: suitability – Customisation: profiling • Not professional clients – Protection: fiduciary; client money, depositary … • Not wealthy but inclusive clientele – Preferences: path, utility, subjective probabilities – Terminal wealth; goal (ranking); liability driven – Small (vulnerable): portfolio funding problem
7. IOSCO (2013) • ETFs are – OECIS that trade throughout the day like a stock on the secondary market (i.e., through an exchange). – Generally, ETFs seek to replicate the performance of a target index and are structured and operate in a similar way. – Like operating companies, ETFs register offerings and sales of ETF shares and list their shares …
8. IOSCO (cont) – Investors may trade ETF shares continuously at market prices, but ETF shares purchased in secondary market transactions usually are not redeemable from the ETF except in large blocks called creation units. – ETFs may be index based or actively managed, and may pursue their investment objectives using a physical or synthetic investment strategy …
9. Good News • .
10. AUM: Beta vs Alpha
11. European ETF Data • https://www.justetf.com/uk/ • http://www.etfgi.com/ • Note: “coverage” (“XXX distribution”); cross- listings; currency; tax (IE vs LX)
12. Reference Data (Quality) • From few to 114 fields (some pre-calculated) Fund Name Stock Lending AT Share Class End-of-month 12month average on loan (% of NAV) …. ETF Bloomberg Code Securities lending return 12 month in % of average NAV Leveraged ETF ETF Reuters Code Total Expense Ratio In % pa Long Or Short Strategy ISIN Total Fund Assets Under Management In EUR Share Category WKN Assets Under Management In EUR for share class Structure … Assets Under Management In Original FX in shareclass For Sophisticated Investors Only Domicile ETF Performance (1 month) in bps EU Savings Directive Benchmark Name ….. … Benchmark Bloomberg Code Annualized ETF Performance (since inception) in bps Austrian Capital Tax Yield …. …. ISA/SIPP Asset Class Tracking Difference (1 year) In bps UK Tax Reporting Geographic Focus ….. Swiss Reporting Sector/Theme Tracking Error (1y) In bps Primary Exchange Currency Launch Date ….. Listing Currencies Income treatment Fund Indicative Daily Traded Volume last 1M In EUR Xetra Dividend Frequency Indicative Daily Traded Volume last 1M In EUR for share classes …. Shareclass Currency Index Div Yield 12M London Stock Exchange - GBP Fund Currency Modified Duration (in years) London Stock Exchange Reuters - GBP Currency hedged Coupon(%) Sales Restriction Interest Rate - Hedged Yield to Maturity Link to Factsheet Investment Methodology Convexity Link to KIID Portfolio Structure
13. ETP Border • Fund objective – “Classification” • Asset class location and strategy – index vs (alternative) weighting • “Passive” – not buy and hold – Systematic. Transparent; risk manageable • Leveraged (unfunded), inverse .. – tracking error; derivatives on ETFs
14. “Smart” and Exotic ETF • Bonds – Bond index construction criteria in NIRP regime • Commodities – Plethora: volatility (iPath VIX) • Convertible bonds: index as well as arbitrage – S&P vs ECBD “TR Balanced Euro” .. • ETF^2; strategy replication … • IQShares; managed futures (CTA): Active strategy index replication (vs index fund)
15. ETFm.eu Universe @ 6/5/16
16. Portfolio of ETFs – ETFmatic “live”, 6 May 2016
17. Delegated Management • Fund Management: Labour, inputs, brands … – Clients: beneficiary? Preferences? Horizon? Free capital? Counterparty? Trust? Costs? – Protection: De-accumulation stage • Selection vs rebalancing problem: “awards” • Objective ≠ Investment View – “Hands-free”: self-driving or not. Destination. • Fung: Asset class location, instrument, strategy, timing • Pricing “Alpha”: pay only if it is rare (or unique)
18. Out of Fashion – http://www.investmentweek.co.uk/investment- week/news/2457172/state-of-the-nation-wealth-managers- reveal-their-biggest-fund-selection-concerns-but-play-down- brexit-threat
19. Final Year Projects • EU client “localisation”; completion portfolios • Tax losses harvesting • Regulation-proof client risk profile & segments • De-accumulation: (diversified) income • Fractional share trading benefits • Performance attribution and path storytelling • Product performance fees
20. Q & A • Marketing vs pricing investment management • Absolute or relative; “” as “undiscovered”  • Value for money (or time) – Hedged, more agile strategies outperform; fully digital is downwards scalable • “Use of digital, rise of customer-centricity and shift in end customer base combine to radically alter the fund management industry”, Redington – “Non Beta”: activist, event driven; cross-asset and capital structure arbitrage; macro trading
21. Appendices • Additional research topics: MiF, PhD • Investment management – Business – Hobby
22. Portolio management • Customisation • Trading • “The automated fractional dealing proposition allows trading and holding of ETFs to four decimal places”
23. Not So Small Print • Factors. Costs. Activity
24. Audited Accounts • .
25. Expenses • .
26. Distributions • .
27. Attribution • .
28. Not a charity • .
29. Dark Side • .
30. Size • .
31. Example: Liquidity (24/7)
32. Graveyards • .
33. Stefanova et al (2016)
34. Fund marketing • Vs ETF etc
35. MiF Research: Risk • Taxation: capital gain, income, retirement • Not IRR, variance … – Ruin; impairment (“return of capital”); liquidity • Portfolio level: smart Beta fashion – Hedged, agile strategies outperform – Diversify (but not totally into DGF); correlation; • Macro – NIRP; volatility arbitrageurs modal view
36. PhD Research: Systemic • Flows – Equilibrium • Deposit modelling and fund runs – Redemption and liquidity – P2P rebalancing • Custody: client money, non-gamed – Collateral, lending
37. Fund Management Company • On-Shore Authorised and regulated firm – Costs, margins (“quality”?) – Listed or private? focus Man Plc: 605) • Investment strategies and products – passive (index, exchange traded products), active (mutual fund), hyper-active (long/short, hedged, leveraged) • Client support. Personal experience – Contract design; suitability
38. Personal Investment Business • Investing: Principal/Agent – Delegation: total costs (→ 0%) – Why trading? How “they” trade for you? “trust”? – Hobby? Job? Business? Advisory? • Cost/Benefit – Market efficiency and innovations
39. SEC, ESMA
40. Operational Risk • Efficiency – Secondary synthetic liquidity • Xetra Quote Request, etc • Specialists vs brokers • Collateral and lending • Physical vs synthetic (French) – ETF sponsor: not a bank in the US, unlike Europe