What is an Etf s Fair Value

8/12/2019 What is an Etf s Fair Value

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Whats An ETFsFair Value?

Dave Nadig, Moderator

Director of Research, IndexUniverse

Robert Rushe, Panelist

Head of ETF Servicing, Ireland

State Street Global Services

Matt Holden, Panelist

Head of ETF Trading, Europe, Knight Capital Group

Samu Lang, Panelist

Investment Director, Partner, Global Asset Allocation

Taaleritehdas Asset Management Ltd.

Kris Walesby, Panelist

European Head of Capital Markets

ETF Securities


2/22

Robert RusheHead of ETF Servicing, IrelandState Street Global Services

ETF Values:The Basics


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ETF Value vs. Equity Value

ETFs do not price like equities

Value is based on balance sheet only

Unlimited number of shares on issue

No price squeeze


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Spreads

Lack of on exchange liquidity may not result in

higher spread

Spread limited by the cost of creation/redemption

Multiple creation/redemption models used


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The Value of iNav

iNAV shows current estimate NAV value of fund

based on real-time pricing data

Only shows last traded value. No bid/ask spread.

Only updates when underlying markets are open

Calculation methodologies can differ


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Know the Product

Knowledge of specific ETF is key to best execution

Primary Market Dealing model & Cost

Underlying pricing timelines

Most active Market Makers for specific product


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Market Makers,

Arbitrage and

Creations

Matt HoldenHead of ETF Trading Europe

Knight Capital Group


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What Triggers an Arbitrage Trade? Assess the iNAV you are using is accurate

Most market makers calculate iNAV directly or via a proxy calculation Use the published iNAV either as your iNAV or as a check

Understand or assess the cause of any premium or discount

Does the live market greatly vary from your iNAV...if so, why?

Envisage the unwind or exit point of the trade and ensurethis is priced in

Does the fund have a fluid create/redeem process or is it limited and

restrictive?

Can you shift your hedge into the fund easily or is a proxy hedge

more efficient?

Is there enough secondary market flow in the fund to exit via

another trade?


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Assessing if an iNAV is Accurate

iNAVs can be a useful tool for assessing an ETFs fair value...but beware!

Some key questions one should ask with respect to an iNAVs accuracy:

Do the underlying assets price transparently?

Equities are most transparent

Bonds are less transparent

Are the assets part of a single market or listed under a single currency?

Single currency and single market has less room for error

Multiple currencies, regions and markets can be error prone

Does the calculation involve a proxy setting for regions

that are not open? Is the iNAV independently calculated by an exchange or

a market data provider?


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Effects on the Spread or Cause of Prem/Disc

The Achievable Spread is affected by several factors and liquidity pools.

OutrightMarket Makers

Options Trading

High Frequency

Trading

Hedging

Strategies

Investment

ManagersRetail Investors

Proxy Arbitrage

Market Makers

Pure Arbitrage

Market Makers

Achievable

Spread

Removing or increasing the influence ofany of these factors will increase spread

or shift the spread to premium or

discountUpper Fair

Value Offer

Upper Fair

Value Bid

Achievable

Spread either widens or

shifts in the range

to premium or

discount


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Whats the Costof an ETF?

Samu Lang

Investment Director, Partner,Global Asset Allocation

Taaleritehdas Asset

Management Ltd.


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REAL CASE: iShares Euro High YieldMost of the time trades at a premium! Why?

Index constituents priced @ bid

Creation cost NAV +150 bp (redemption NAV -25 bp)

What other factors influence the premium?

Flow direction

Market maker hedging costs


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101,4

101,6

101,8

102,0

102,2

102,4

102,6

102,8

103,0

8:38:24 9:36:00 10:33:36 11:31:12 12:28:48 13:26:24 14:24:00 15:21:36 16:19:12 17:16:48 18:14:24 19:12:00

BID ASK INAVHYGE Index

4.4.2012 Sell IHYG LN 40419 units

Factors were looking at: NAV and INAV vs. quoted BID (on screen & OTC)

Consolidated tape / cross -exchange quotes

Itraxx Crossover intraday

Calculating INAV reliably is difficult at least for us !

Order placed with our trader

Order filled

12 793 on screen @ 102,23 27 626 OTC risk price @ 102,11

Average 40 419 @ 102,15


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4.4.2012 Sell IHYG LN 40419 units

Total proceeds 4,13 meur (40419 @ 102,15 )

NAV 4.4.2012 100,97 (cut-off 14.00 GMT)

After issuer redemption fee (25bp) net price for NAV

order 100,72

Loss if sold @ NAV => 57 718 !

Be carefull when trading fixed income ETFs

Know at least how the Underlying index and ETF arevalued and the creation/redemption costs associated

with NAV+ funds


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Fair Value In

Relation ToCommodities

ETP Trading

Kris WalesbyEuropean Headof Capital Markets

ETF Securities


18/22

Proxy Hedge Fair Value For many commodity products there is continuous pricing on the underlying

However what happens when this is not the case? Proxy Hedges

Cocoa and Coffee futures are closed during the beginning of European trading

Cocoa opens at 9am UK time

Coffee opens at 8:30am UK time

During that period market makers will use the prices of cotton and sugar as aproxy hedge

Also market makers can interpolate un-open components from broad baskets

e.g. All Commodities

Result Market makers will widen spreads to compensate for the risk of

proxy hedging


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Agricultural commodities on CME

13:15 15:30 UK time underlying markets are closed

There is a rolling auction as a reference but the price is not a good basis forfair value because the orders driving the auction can be cancelled

Therefore the best proxies become the ETPs themselves

Also, there are some futures on NYSE Euronext that can be used forhedging too

ETP Pricing

Sometimes The Best Indication Of Fair Value


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Whats An ETFsFair Value?

Dave Nadig, Moderator

Director of Research, IndexUniverse

Robert Rushe, Panelist

Head of ETF Servicing, Ireland

State Street Global Services

Matt Holden, Panelist

Head of ETF Trading, Europe, Knight Capital Group

Samu Lang, Panelist

Investment Director, Partner, Global Asset Allocation

Taaleritehdas Asset Management Ltd.

Kris Walesby, Panelist

European Head of Capital Markets

ETF Securities

Documents

What is an Etf s Fair Value