ETF 101 for economists_Lettau and Madhavan (2018) Flashcards
What is Exchange Traded funds (ETFs)?
Are new financial instrument that gives a lot of new opportunities in comparison to old types of investments.
What is Authorized Participant (AP)?
AP are like market makers which buy stocks, receive ETF shares, and sell shares on the secondary market to investors.
How Mutual funds operate?
THey make all transactions at the end of the day and interacts with investors and capital markets directly.
How ETF emits its shares?
ETF emits shares to an Authorized Participant for baskets of securities.
How ETF price is set?
Trade on the AP or exchanges by investors set the price, so not directly with the fund.
When ETF shares are created or redeemed during the day?
Between AP and the fund at the end of the day, AP locks in profits during (make no arbitrage)
What are the transaction costs for MF, for those investors that remain? How NAV is affected by selling stocks?
Redemption/creation of shares causes remaining investors to suffer the cost of transaction as they are still subscribed.
Selling of stocks can make NAV lower.
Why other investors are not affected by transaction costs in ETF?
Sellers and buyers are directly connected on the exchange, thus, others are not affected.
Which you can short, margin ETF or MF?
ETFs can be shorted, sold on margin and be lend. Also, ETF base their holdings on specific strategy, therefore, it has higher transparency.
Are ETFs at risk of a flash event?
No, ETF are affected
