Markup Calculation Methodology
(Jun 2013)
Our study looks at markups and markdowns implied by EMMA trade data. My colleagues have shown an example of how we calculate the markups, but I wanted to illustrate the methodology used to handle the more complex cases that arose when analyzing the trade data.
There were effectively four cases that we needed to address. The first case occurs when inter-dealer trades occur on the same business day as the customer trade. In that case we computed the volume weighted average price (VWAP) of the...
Alternative Ways to Gain Municipal Bond Exposure
(Jun 2013)
We've been covering municipal bonds, with a focus on markups, this week on the blog. So far we've discussed some basics, given an example of an excessive markup and introduced SLCG research on excessive markups in municipal bonds . Given that retail investors may be charged excessive markups when purchasing municipal bonds directly, it may make sense for them to purchase municipal bonds indirectly.
Jason Zweig has written a great follow-up to his coverage of the muni markups issue with a...
Retail Investors and the Municipal Bond Market
(Jun 2013)
This week, we will be discussing the buying and selling of municipal bonds by brokers on behalf of retail investors. But to start, let's address some basic questions about the municipal bond market.
What are municipal bonds and how are they traded?
Municipal bonds are simply bonds issued by a state and local government or authorities. Municipal bonds can be general obligation bonds, meaning they are not used to fund specific projects, or they could be issued to finance a new highway, a public...
Dodging Hedge Fund Requirements: The Case of Mariner Access
(Jun 2013)
Nowadays, there are several ways that retail investors can purchase risky investments which would typically be considered unsuitable. For example, many exchange-traded funds (ETFs) use derivatives to offer investors access to risky asset classes (such as CDOs) or complex options positions (such as covered calls). Since ETFs can be bought and sold like any other listed stock, essentially any investor can now take covered call positions regardless of her understanding of options. There is even...
Do ETFs and Mutual Funds with Higher Fees Outperform?
(Apr 2013)
There was a great comment on our post about FINRA's Mutual Fund Expense Analyzer.
Is there a positive correlation between fees and gross returns? In other words, are investors who pay higher fees compensated by higher returns?
On the one hand, one might expect that in order to garner high fees, a fund would have to earn higher returns; but on the other, it may be the case that higher fees simply erode profits and yield lower total returns.
We looked at data provided by Bloomberg on all...
Are ETF Flows Costly to ETF Investors?
(Apr 2013)
Exchange-traded funds (ETFs) are often lauded for their ability to efficiently create or redeem shares in response to changes in demand for the fund (known as fund flows). However, new research suggests that some ETFs that hold international securities may face transactional frictions that prevent them from tracking their benchmarks as well as other ETFs.
When there is an imbalance between supply and demand for an ETF, authorized participants (APs) create or redeem shares of the ETF to...
New Study Comparing Indexed and Actively Managed Funds
(Apr 2013)
NerdWallet, a San Francisco based personal investing site, has performed a historical study of the returns on almost 8,000 mutual funds and ETFs over a ten year period and found that passive indexed funds tend to outperform actively managed funds on average. In fact, they found that only 24% of actively managed funds outperformed the average return of the indexed funds. These results are consistent with the annual SPIVA Scorecard produced by S&P Dow Jones Indices, which found in both 2012...
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,...
