How Big of an Effect Does Securities Lending Have on ETF Returns?
(Feb 2013)
We earlier posted an analysis that compared ETF returns to their stated index net of fees for funds that lend securities and those that do not. IndexUniverse subsequently suggested an approach with methodological differences from our original work and we wanted to address some of those differences here.
For our sample, we used Bloomberg's ETF function to collect all US-domiciled, USD-denominated exchange-traded funds and removed any with active trading strategies, leverage, or inception dates...
Securities Lending by ETFs
(Feb 2013)
One of the most contentious but least understood aspects of the stock market is short selling. Short selling refers to selling a stock that you do not own at current market prices, with the hopes that the stock will go down in price. The stock can be purchased in the market at any time to close out the position and, if the stock has decreased in price, the short-seller will realize a profit. Obviously, the only way to accomplish this is by borrowing that stock from someone else.
Typically,...
Chinese Markets are Closed--So What Happens to China-based ETFs in the US?
(Feb 2013)
Happy Chinese New Year! Markets were closed in many Asian countries last week, while US markets remained open. As noted by several commentators, this means that while US ETFs that hold Chinese equities were actively traded, their underlying assets were not. So what does this mean for China-based ETFs traded in the US?
First, it's important to note how ETFs relate to their underlying assets. Essentially, ETF shares can be created by certain traders (called authorized participants) by buying...
Structured Certificates of Deposit Week
(Feb 2013)
Over the past several months, we have noticed more and more bank deposits that resemble structured products. These products go by various names: market-linked certificates of deposit, equity-linked certificates of deposit, contingent interest certificates of deposits, etc. For parsimony, we refer to these types of products as "structured CDs" or simply "SCDs".
We think structured CDs are a very significant development, as they can be designed to provide highly complex exposure, are almost...
Why a Physical Copper ETF Might be a Really Big Deal
(Dec 2012)
JP Morgan recently obtained approval by the SEC to launch a new copper ETF that, instead of holding derivatives linked to copper, will actually accumulate physical copper itself. While this may not seem like a thrilling market development, there are serious concerns that if this ETF becomes popular and garners significant assets, the world market for copper might be upended. Here's why:
Think of demand for copper as having two components: demand for industrial or productive uses and demand as...
Derivatives in Active ETFs
(Dec 2012)
Over two and a half years ago, the SEC initiated a moratorium on approvals for new ETFs that made extensive use of derivatives such as options and futures contracts. Much of the concern at that time was that derivatives-based ETFs, particularly leveraged, inverse, and futures-based ETFs may not have investor protections or oversight commensurate with their level of risk. Regular readers of this blog know that we have spent a good deal of time discussing those issues in addition to our ...
Deliverable Interest Rate Swap Futures
(Dec 2012)
Interest rate swaps are important tools used by many financial and non-financial firms to manage their interest rate exposure. Earlier this week, the CME Group launched a new derivative product called Deliverable Interest Rate Swap Futures with the contention that the product offers "maximum efficiency for managing interest rate exposure." This move is close in spirit to the recent move by the Eris Exchange to offer interest rate swaps on an open exchange. Both of these products are designed...
Do Leveraged ETFs Contribute to Share Price Volatility?
(Nov 2012)
We've talked a lot about leveraged and inverse Exchange Traded Funds (LETFs)and the problems that can arise from their rebalancing. A recent paper from a group at York University asks two simple but interesting questions: does this rebalancing affect the volatility of the underlying assets? If so, can a sophisticated trader exploit that effect to achieve excess returns?
On the first question, the authors find two main results. First, the directional trades LETF providers and counterparties...
