ETF ETFs

In my understanding, that scenario describes a listed investment company (LIC) not an ETF. A LIC is "closed end" meaning that there are only a set number of units available, and these units are traded between parties.

Alternatively, ETFs are "open ended", so the number of units available increase or decrease daily just like traditional managed funds.

You certainly do have to sell to someone though, and that person is the middle man, the market maker. It's explained in this diagram:

http://www.streettracks.com.au/PDF/IntroductionToETFs.pdf

I find it a little complicated actually and haven't tried to understand it too much. I have just understood that 'it works' and that's been enough for me.

But if someone can explain it in detail that'd be great.

 

Hiya Sim,

The following document might be of some use:

http://www.streettracks.com.au/PDF/ETFs.pdf

The following is an extract which may or may not be up-to-date:

"Citigroup Global Markets Australia (​

​

CGMA) are used by State Street as a market maker in order to provide intraday valuations for the underlying securities. CGMA are able to price ETFs close to their net asset value (NAV) through relative pricing to the underlying basket of securities and the use of derivative or futures contracts. This allows CGMA to constantly adjust their price to represent the intraday movement of the underlying index. In general, market makers provide liquidity by standing in the market to provide prices close to the intraday expected NAV and to provide buy and sell orders in size as well as special crossing trades for large institutional trades which can be in the millions."​

It's been awhile since I read this document but from memory it seems to give a good basic understanding of these beasts and the processes involved.

Cheers - Gordon

 

Chart Search Result

Graph shows a variation especialy around exdividend but it is a fair mirror of the market.

 

Those reports that used to be on Aegis Equities Research - Login
on LICs that came out quarterly
Does anyone know how to access these now

the aegis website looks complex

I used them as my main source of research in LIC's

 

Simply, the market maker ensures liquidity, by offering buy and sell prices.

But more importantly, the ETF holds a known quantity of shares across the index, and so the traded price is a very close replica of the underlying index, held close by the constant monitoring of fund managers who are looking for an arbitrage opportunity.

In other words, any deviations from the index are exploited by institutional managers. This ensures liquidity by providing buy or sell pressure if the instantaneous price differs from the underlying stock value.

 

Hi dkmc,

The latest Aegis report and reports from other Researchers are found at the ASX site. Go to the following link and in the bottom right corner under "What's New":

Listed Managed Investments - LMIs, fund manager, diversify investments - ASX

Cheers - Gordon

 

Didn't really want to quote myself, but there was an article in the Weekend AFR Nov 17-18, p 41, on liquidity of ETFs.

From the AFR article:

... the products have market makers and there are always traders looking for arbitrage opportunities if the local prices fall below overseas prices...

 

Now under my margin loan -
iShares MSCI EAFE IVE 60%
iShares MSCI Emerging Markets IEM 60%
iShares MSCI Japan IJP 60%
iShares S&P 500 IVV 60%
iShares S&P Europe 350 IEU 60%
iShares S&P Global 100 IOO 60%
iShares S&P Midcap 400 IJH 60%
iShares S&P Smallcap 600 IJR 60%

IEM, IVE, IEU and IOO are currently interesting to me.

 

Nice one Bundy. I see you're ikeen.

 

Good way for me to diversify while keeping it easily trackable and traded. I am not a fan of filling in forms sending them off to the margin lenders and waiting, then having old data feeding through to the lender.