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Broker/Advisor Use Only – Not For Use With the PublicBroker/Advisor Use Only – Not For Use With the Public
The Facts and Fallacies of ETF Investing
Stan UelandETF Portfolio Manager
Broker/Advisor Use Only – Not For Use With the Public
ETFs - State of the State
• ETPs @ 2010*– > 1,000 U.S. Listed– > $ 1 Trillion Assets– 40% Assets in 10 ETPs– 50% ETFs have < $100m– Beta vs. Alpha
• ETF Structure– vs. Mutual Funds– vs. CEFs– vs. Stocks
• Unique to ETFs– INAV– Basket– Creation/Redemption
Process
* Includes ETFs, ETNs as of 12/31/2010
Broker/Advisor Use Only – Not For Use With the Public
TICKER SHARES PRICE MV of 1 CUAFFX 7,987 $6.34 $50,638ALXN 1,542 $47.99 $74,001AMGN 1,156 $54.33 $62,805AMLN 5,107 $12.24 $62,510BIIB 1,441 $44.16 $63,635CELG 1,257 $52.62 $66,143CEPH 1,304 $53.59 $69,881CRA 10,634 $6.20 $65,931GENZ 1,268 $51.70 $65,556GILD 1,536 $43.43 $66,708HGSI 3,552 $19.43 $69,015ILMN 1,626 $41.02 $66,699ITMN 4,919 $12.32 $60,602LIFE 1,458 $47.05 $68,599MIL 989 $69.42 $68,656MYGN 2,624 $25.06 $65,757NKTR 7,381 $8.57 $63,255OSIP 2,223 $32.00 $71,136SQNM 19,593 $3.28 $64,265VRTX 2,036 $32.11 $65,376
Total: $1,311,168Per share: $26.22
FT NYSE Arca Biotechnology Index Fund (FBT) Basket Shares
Example of ETF Pricing
This example is for illustrative purposes and does not represent any actual investment or fund. Source: First Trust Advisors, 8/6/09.
Broker/Advisor Use Only – Not For Use With the Public
This example is for illustrative purposes only. Fund: FTA – First Trust Large Cap Value AlphaDEX Fund. Source: Bloomberg.
The intraday NAV for an ETF is typically calculated and published by a third party under a separate symbol every 15 seconds throughout the trading day over the Consolidated Tape based on the current value of the securities specified for creation and redemption plus any estimated cash amounts associated with the creation unit, all on a per-ETF share basis. The intraday NAV is designed to give investors a sense of the relationship between a basket of securities that are representative of those held in the ETF’s portfolio and the share price of the ETF on an intraday basis.
Example of ETF Pricing
00
Broker/Advisor Use Only – Not For Use With the Public
Liquidity of the underlying holdings is a significant factor in the liquidity of an ETF.
Liquidity of underlying: Shares trade $7.5b per day
$10m / $7.5b
= 0.13% of ADV
Buy $10m in FNX (First Trust Mid Cap Core AlphaDEX Fund)
Trader’s perspective:“Stock trades $467k per day”
$10m / $467k
= 2,140% of ADV
This example is for illustrative purposes only. ADV statistics as of 1/7/2010.
ETF Liquidity
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ETF SponsorETF
Market MakerAP
InvestorAdvisor
ETF
ETF Structure Provides Liquidity
Broker/Advisor Use Only – Not For Use With the Public
Market MakerAP
ETF SponsorETF
This example is for illustrative purposes and does not represent any actual investment or fund.
ETF Structure – Creation
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8,300 = Average Daily Volume
145,000 = Total Volume for the Day
92,800 = Size of a Single Trade
$4.6m (28%) = Growth in the Fund for the Day
ETF Liquidity Examined
FTA – First Trust Large Cap Value AlphaDEX Fund. (7/1/08) This example uses actual data for illustrative purposes only.
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ETF Liquidity – Cases in Point
• 1.8M share trade (17k = 30 day ADV)• Microcaps – Smallest/Compelling
FDM
• 3.8M shares trade (21k = 30 day ADV)• $114M – growth in a single day
BICK
• 16.3M shares trade (257k = 30 day ADV)• 250k shares at the bid
FXO
• 4.5M shares trade (85k = 30 day ADV)• Buying commodity exposure via equities
CU
FDM – 5/7/10; BICK – 10/4/10; FXO & CU – 3/23/11
Broker/Advisor Use Only – Not For Use With the Public
ETF Structure – Redemption
Market MakerAP
ETF SponsorETF
This example is for illustrative purposes and does not represent any actual investment or fund.
Broker/Advisor Use Only – Not For Use With the Public
Traditional Mutual Fund Example
ETF Structure Compared to Mutual Fund Structure
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Market MakerAP
InvestorAdvisor
ETF
ETF SponsorETF
ETF Structure – Redemption Revisited
Broker/Advisor Use Only – Not For Use With the Public
17.6
17.7
17.8
17.9
18
18.1
18.2
18.3
8:30 9:00 9:30 10:00 10:30 11:00
FXG-IV FXG trades
15
15.2
15.4
15.6
15.8
16
16.2
16.4
8:30 9:00 9:30 10:00 10:30 11:00
FXD-IV FXD trades
Despite a meaningful selloff, both small and large ETFs trade up tight to their Indicative Value.
ETF Liquidity – Case in Point (FXG & FXD)
Graphs reflect Central time. Source: Bloomberg – 5/21/10. This example uses actual data for illustrative purposes only.
Ticker: FXGMarket Cap 26,131,65330 day ADV 14,2818:30-11 Volume 110,385% of 30 day ADV 773%Shares Redeemed 100,000
Ticker: FXDMarket Cap 150,330,070 30 day ADV 173,251 8:30-11 Volume 1,148,268 % of 30 day ADV 663%Shares Redeemed 300,000
Broker/Advisor Use Only – Not For Use With the Public
Thoughts on Trading ETFs
Tips— Open/Close— Limits— iNAV— INTL funds— Stops Stop Limits Alerts— Implementation
Engage Us— Assistance— Access— Trading Desks
‘It’s an ETF’
This example is for illustrative purposes and does not represent any actual investment or fund. Graph reflects Central time. Blue line = iNav, Red line = Best Bid, Green line = Best Offer
8:30 9:00 9:30 10:0010:3011:0021.4
21.5
21.6
21.7
21.8
21.9
22
22.1
22.2
22.3
22.4
Daily Fund Pricing
Time
Price
Example of Daily Fund Pricing
You should consider the fund’s investment objectives, risks and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 or visit www.ftportfolios.com to obtain a prospectus or summary prospectus which contains this and other information about the fund. The prospectus or summary prospectus should be read carefully before investing.