ETFs

ETFs are

investment funds priced and traded on stock exchanges like stocks

traditional ETFs:

passive investment strategy
- tracking an index
- 1993 SPY

leveraged ETFs since

2006

actively managed ETFs since

2008

active non-transparent (ANTs) ETFs since

2019

ETFs advantages

diversification
low cost
tax efficiency
transparency

trading features of stocks:

can be traded during the day
limit orders
short selling
options
margin-ability

mutual funds comparison

SEC regulations: yes
investors: all
transparency: high
liquidity: medium
strategies: prospectus
fees: low
restrictions: short selling, investment grade bonds

ETFs comparison

SEC regulations: yes
investors: all
transparency: extremely high
liquidity: high
strategies: passive
fees: very low
restrictions: very low

hedge funds comparison

SEC regulations: no (limited)
investors: sophisticated
transparency: very low
liquidity: very low
strategies: no limits
fees: high
restrictions: no

barriers to arbitrage

- decreased transparency of ETF holding

- low liquidity of underlying securities

- time differences in trading of ETF and underlying securities (stale pricing)

- restrictions on in kind transactions

largest ETFs

SPY
IVV
VTI
VOO

AUM

assets under management

AUM =

# shares * P(ETF)

investors favor

low-cost ETFs by the biggest providers

funds typically close if

they don't gather enough assets

an average benchmark for success is

$50 million to $100 million in assets within 3-5 years of launch

actively managed ETFs

- new fast growing financial product
- launched in 2008
- concerns of pricing efficiency
- SEC requires disclosures of identities and weighting of holdings daily

active ETFs operate mainly in

bond category
- opaque OTC markets, low liquidity

ANTs ETFs

- approved by SEC 2019
- disclose holdings quarterly, not daily
- can pursue active investment strategy
- severe lack of transparency
- SEC limits investments to only securities that trade simultaneously as funds themselves
- required to provide additional info on creation and redemption baskets and intraday NAVs

leveraged ETFs

- promise to pay shareholders a multiple of the daily change in the underlying
- use derivative contracts (swaps, futures, options) that are rolled usually quarterly
- frequent rebalancing to maintain promised leverage

concerns with passive investment

no fundamental analysis
no corporate governance

concerns with increased volatility in the underlying

arbitrage pricing mechanism
rebalancing by LETFs

concerns with liquidity

increased trading in relatively illiquid markets may lead to increased volatility

concerns with exogenous negative price shocks

may lead to panic selling by institutional investors that face redemptions from investors

concerns with leverage ETFs

rebalancing adds upward price pressure in good times and downward pressure in bad times

concerns with counterparty risk

LETFs, ETFs using synthetic replication