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EXCHANGE-TRADED FUNDS: MECHANICS AND APPLICATIONS - Coggle Diagram
EXCHANGE-TRADED FUNDS: MECHANICS AND APPLICATIONS
Differences from mutual funds
Trade intraday
Trade at ETF prices (in line with NAVs but might be higher/lower)
In-kind (share-for-share swap)
Arbitrage gap: The price at which APs willing to step in and create or redeem shares
role of AP
APs pass all costs in the ETF’s bid–ask spread
Special group of institutional investors (large broker/ dealers, often market makers).
The only investors who can create or redeem new shares of an ETF (authorized by the ETF issuer).
Lower cost
Tax efficiency
Stocks with low acquired costs → High unrealized gain
Reduce tax
Keep market prices in line with NAV
APs will engage in arbitrage transactions if the ETFs trade at a price significantly different from their NAV.
US Settlement
National Security Clearing Corporation (NSCC) guarantees the performance of parties to a trade on an exchange
Depository Trust Company (DTC) transfers the securities
European Settlemen
phí cao
OTC
sources of tracking error for ETFs
Expense ratio
Portfolio complexity
Number of securities held
Frequency of rebalancing or strategy implementation
Difficulty in maintaining portfolio exposures
Issuer size
Competitive landscape
Index Tracking/Tracking Error
Periodic tracking
Daily differences
Source of tracking error
Fees and expenses: ETF’s underperform its benchmark
Representative sampling/optimization: tính đại diện cho index thấp
Depositary receipts and other ETFs
Differences in trading hours
Differences in security prices
ETFs’ holdings are valued at their closing market price (not their NAV)
Index changes
Index provider
ETF’s portfolio managers
Create discrepancies in value
Fund accounting practices
Regulatory and tax requirements
Asset manager operations
Lend a portion of their portfolio holdings to short sellers→ In come for the portfolio.
Work with foreign governments to minimize tax paid on distributions received (foreign dividend recapture).
ETF Bid–Ask Spreads driver
Market structure
Opening hour and time zone in different markets
Liquidity of the underlying securities
Types of underlying held: less liquid or liquid
Sources of ETF premiums and discounts
Timing differences
Hold foreign securities
OTC bonds
Stale pricing
NAV may differ from the stale price (2:00 pm price) of the ETF
Total costs of ETF ownership
short-term ETF investors
Commissions
Bid–ask spreads
Premiums/discounts to NAV
longer term ETF investors
Management fees
Tracking error
Other costs