The ETF Handbook: How to Value and Trade Exchange Traded Funds

274 Pages·2010·2.06 MB·English

by  David J. Abner

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The ETF
Handbook
How to Value and Trade
Exchange-Traded Funds
DAVID J. ABNER
John Wiley & Sons, Inc.
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Copyright(cid:1)C 2010byDavidJ.Abner.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
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LibraryofCongressCataloging-in-PublicationData:
Abner,DavidJ.,1969–
TheETFhandbook:howtovalueandtradeexchangetradedfunds/DavidJ.Abner.
p.cm.–(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-55682-5(cloth)
1.Exchangetradedfunds. I.Title.
HG6043.A262010
332.63(cid:2)27–dc22
2009044660
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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For Sophie, Sam, and Lucy Abner, my future ETF traders
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Contents
Preface ix
Acknowledgments xvii
PARTONE
IntroductiontotheETFMarketplace 1
CHAPTER1
DevelopmentofanETF 5
MarketAccessorOutperformance? 6
IndexTrackingorActivelyManaged? 7
UnderlyingAssets 8
RebalancingandIndexChanges 9
ETFBasket 10
Conclusion 21
CHAPTER2
StructureofanETF 23
CategorizingExchange-TradedProducts 24
ETFRegulation 26
Exchange-TradedNotes 32
Taxation 34
WhenStructuralIssuesArise 37
Conclusion 39
CHAPTER3
BringinganETFtotheMarket 41
PartneringwithanExchange 42
LeadMarketMaker 42
ETFIncubation 44
ComparingFeesbyStructure 53
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MarketingandLaunch 54
Conclusion 55
CHAPTER4
InvestmentCompanies,NowandintheFuture 57
IntheBeginning,ThereWereClosed-EndFunds 59
MutualFunds 64
ActivelyManagedETFs 67
ETFswithinthePortfolio 68
ClosingofETFs 72
Conclusion:TheFutureofETFs 73
PARTTWO
Exchange-TradedFundValuation 77
CHAPTER5
ETFswithDomesticConstituents 79
CalculatingtheNetAssetValue 80
DiscountsandPremiums 83
CalculatingtheIntradayIndicativeValue 88
Conclusion 92
CHAPTER6
ETFswithInternationalConstituents 93
InternationalETFs 94
ProvidingLiquidity 101
Conclusion 104
CHAPTER7
Fixed-IncomeandCurrencyETFs 105
FixedIncome 107
CurrencyETFs 112
Conclusion 117
CHAPTER8
Leveraged,Inverse,andCommodityProducts 119
IntroductiontoLeveragedProducts 119
UnderstandingInverseETFs 126
CommodityETVs 128
Conclusion 131
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Contents vii
PARTTHREE
ETFTradingandExecution 133
CHAPTER9
TradingVolumesandETFLiquidity:KeystoUnlockingValue
fromtheETFStructure 135
HowIsanETFDifferentfromaStock? 136
ABriefLookatEquityTradingVolumes 137
ADetailedLookatETFTradingVolumes 138
ETFMoneyFlows 145
Conclusion 153
CHAPTER10
ETFTradingBusiness:AssessingandProvidingLiquidity 155
TradingModel 156
MeasuringPotentialAvailableETFLiquidity 159
RequirementsforanETFTradingBusiness 163
Conclusion 165
CHAPTER11
Execution:HandlingClientOrderFlowandAchieving
ExecutioninETFs 167
TimeFramesandOrderTypes 168
MarketOrders 170
LimitOrders 172
Algorithms 174
RiskMarkets(UtilizingBroker-DealerCapital) 176
CreationsandRedemptions 179
ExamplesofExecutionsintheMarket 185
Conclusion 190
CHAPTER12
MarketParticipantsandTheirTradingStrategies 193
Broker-DealerFacilitationDesks 195
ElectronicMarketMaking 202
LiquidityAggregators 206
TradingStrategies 207
Conclusion 216
APPENDIXA
ListofU.S.ETFIssuers 219
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APPENDIXB
ResearchandDataProviders 221
APPENDIXC
ETF-RelatedWebSitesandBlogs 223
APPENDIXD
ListofETFsinRegistration 225
Notes 243
AbouttheAuthor 247
Index 249