ETFs Flashcards
Creation Basket
List of securities ETF manager wants to own, disclosed everyday.
A list of requiered in-kind securities published each day by the ETF Sponsor.
Serves as the portfolio for determining the intrinsic NAV of the ETF
Sources of tracking error for ETFs
Fees and expenses
Representative sampling / optimization
Depository Receipts and ETFs
Index change
Fund accounting practice
Regulatory and tax requirements
Asset management operations
Tracking error
Annual standard deviation of daily return differences of ETF and index.
Spreads & Their Relationships - On going order flows
Negatively related: As more order flows (volume) go through the narrower spreads.
Spreads & Their Relationships - Actual Costs
Positively related: As the costs increases, the wider the spreads
Spreads & Their Relationships - Competition
Negatively related: As competition increases, the narrower the spreads
ETF share price > Intraday N.A.V.
Trading at a premium.
AP buys the creation basket in exchange for new ETF shares (Creation units).
The new shares are then sold on open market for a profit.
Sells ETF shares - Buys creation basket
ETF share price < Intraday N.A.V.
Trading at a discount
ETF shares are trading at a discount - Creation basket is at a premium
Buys ETF shares and sells the redemption basket
Redemption Basket
List of securities the ETF manager wants to sell.
The basket of securities the AP (Authorized Participant) receives when it
redeems the ETF shares is called the redemption basket.
ETF Prices may be a less accurate reflection of fair value than NAV when…
The ETF is less actively traded.
ETF that trade infrequently may alos have large premiums or discount to NAV.
If the ETF has not traded in the hours leading up to the market close, NAV may have significantly changed during that time.
What is “stale pricing” in ETF
ETFs that trade infrequently may also have large premiums or discounts to NAV.
If the ETF has not traded in the hours leading up to the market close, NAV may have
significantly risen or fallen during that time owing to market movement.
The use of ETF in managers transition activity is meant to
Maintain interim benchmark exposure.
What is the purpose of maintain exposure to target weights in ETFs
The use of ETF for Portolio rebalacing.
How do we use ETF for portfolio completiton strategies
To fill gaps in stratigic exposure in a country or sector.
For liquid ETF, the bid-ask spread can be…
Can be significantly tighter than the spreads on the underlying.
Cash equitization/liquidity management
Minimize cash drag by staying invested in benchmark exposure
Portfolio Rebalacing
Maintain exposure to target weights
Portfolio Completion
Fill gaps in strategic exposure
Manager transaction activity
Maintain interim benchmark exposure during manager transitions.
What is iNAV of an ETF
Indicated NAV.
iNAV are intraday fair value estimates of an ETF share based on its creation basket composition for that day
The amount of ETF shares created or redeemed is based on:
The quantities listed in the creation basket.
How is an ETF expected to perform relative to its benchmark
Underperform its benchmark by the ammount of its expense ratio.
Which costs of owning an ETF is more important for a long-term holder?
Managment fee and tracking errors.
Which costs of owning an ETF are more important to a shor-term trader?
Premium/Discount to NAV.
What is the iNAV based on?
Intraday FV estimation of an ETF is based on the ETFs creation basket composition for just that day.
