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ETFs

Discussion in 'Exchange Traded Funds (ETF)' started by Simon Hampel, 10th Nov, 2007.

  1. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Okay - I haven't had a chance to do much research into ETFs yet, so I thought I'd start by asking a basic question to those who have ...

    With an ETF, my understanding is that when you buy/sell your ETF "shares", you are actually just trading with other investors, and not buying/redeeming units like you would in a managed fund ... is that correct ?

    If so, what impact does a correction or downtrend have on the price of the shares if a lot of people are trying to cash out to minimise their losses ? Could you conceivably run into liquidity problems if there was simply nobody who wanted to buy your shares ? Or does it not quite work like that ?
     
  2. Glebe

    Glebe Well-Known Member

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    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.
     
  3. austing

    austing Well-Known Member

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    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
     
  4. bundy1964

    bundy1964 Well-Known Member

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    Chart Search Result

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

    Simon Hampel Co-founder Staff Member

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    Thanks Gordon ... that was a very good summary and included a nice list of advantages and disadvantages.

    I'll have to look at adding support for showing ETFs and other LMIs to my Compare Funds website - it would be interesting to see comparisons against managed funds.
     
  6. dkmc

    dkmc Well-Known Member

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    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
     
  7. Rod_WA

    Rod_WA Well-Known Member

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    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.
     
  8. austing

    austing Well-Known Member

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    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
     
  9. Rod_WA

    Rod_WA Well-Known Member

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    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...
     
  10. bundy1964

    bundy1964 Well-Known Member

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    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.:D
     
  11. Rod_WA

    Rod_WA Well-Known Member

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    Nice one Bundy. I see you're ikeen.
     
  12. bundy1964

    bundy1964 Well-Known Member

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    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.