ETFs 201: How To Trade ETFs. AURELIEN CRISTINI ETF Trading, Europe BNP Paribas CIB. GUIDO STUCCHI, CFA Head of ETF and Index Fund Management THEAM

Transcription

1 Presenters: ETFs 201: How To Trade ETFs AURELIEN CRISTINI ETF Trading, Europe BNP Paribas CIB GUIDO STUCCHI, CFA Head of ETF and Index Fund Management THEAM

2 Easy to trade Underlying markets Trading costs Broker Liquidity Market Maker OTC Bid Offer spread Authorised Participants Indices Execution Primary market Trading hours Settlement Depth Order type Market order Transparency NAV trade Premium / Discount Intraday Online platforms Time zones On Exchange Flexibility Creation / Redemption process Order book inav 2

3 ETF combine the benefits of stocks and mutual funds Stocks Flexibility ETF Indexed fund Diversificatio n Easy to trade : real time transactions one click one exposure Low management fees Low Tracking Error Liquid No maturity constraints No ISDA constraints Transparent Highly regulated Multiple market makers No minimum amount required 3

4 ETF: Trading Mechanism The organisation of the ETF market ensures that the ETF price is always close to its theoretical value Secondary Market Primary Market Institutional and Private Investors Fund Manager Private Investors & Institutional Investors Buy / Sell Order ETF shares / Cash Bid / Offer Price Stock Exchange Subscription in cash creation of ETF shares Redemption in cash ETF shares deleted Block Trade (OTC) Market Maker & Authorised Participants Hedging: Futures / Stocks / Bonds / ETFs For illustrative purpose only 4

5 ETF vs other investment solutions Trades on exchange Fixed number of shares Difficult to estimate premiums & discounts vs fair value Stock Trades at NAV (unknown) Variable number of shares No premium/discount Openended fund ETF Trades on exchange & OTC Variable number of shares Small premiums & discounts Closedend fund Trades on exchange Fixed number of shares Large premiums & discounts 5

6 Example of a closed-end fund Actively-managed global equity fund listed on the London Stock Exchange From March 2014 to March 2015: Source: Bloomberg, BNP Paribas 6

7 Example of a closed-end fund Actively-managed global equity fund listed on the London Stock Exchange From March 2012 to March 2013: Source: Bloomberg, BNP Paribas 7

8 ETF NAV ETF price NAV per share = value of assets held by the ETF liabilities (e.g. expenses) Number of share outstanding ETF price : ETF trading price on the exchange driven by supply & demand but always kept at fair price (otherwise arbitraged by Authorised Participants) inav (indicative NAV) : intraday value of the ETF calculated using the ETF s underlying securities live prices 8

9 Arbitrage ensures ETF are fairly priced thanks to the creation/redemption mechanism Example of an ETF trading at a premium ETF price > Value of underlying assets AP buys underl. securities and sells ETF shares for a profit Arbitrage continues until ETF price is in line with the value of underl. securities ETF price = Value of underlying assets For illustrative purpose only 9

10 10 Discounts and premiums ETF trading price can deviate from the theoretical value when arbitrage is not economically viable because of: Underlying basket friction : execution costs, taxes Restricted markets (e.g. closed markets) Different time zones Increase in volatility

11 11 Bid-Ask spread Bid price Risk premium Hedging costs Redempt. costs Creation costs Hedging costs Risk premium Ask price NAV On screen bid-ask spread is made of the best bid and best ask quoted by Market Makers

12 12 WHERE TO TRADE ETF? ETF = Exchange Traded fund, but ~2/3 of the volume in Europe is traded OTC

13 Trading ETF on Exchange - On-exchange liquidity concentrated on a few ETFs in Europe - Well suited for advisers, retail investors - Usually small trade sizes - Different order types : Market order Limit order Stop order Example of a buy order Investor Provides order instructions: - ETF code - Nb of shares - Order type Broker / Platform Places order to the SE Stock Exchange 13

14 14 Trading ETF over-the-counter - More cost-efficient for large orders (above 500 K 1 M EUR depending on underlyings) - Send several pricing requests for the trade to different authorised participants (RFQ platforms) - Different order types : Risk price NAV Several block orders (VWAP: Volume Weighted Average Price) Example of RFQ platforms: Tradeweb, RFQ Hub, Bloomberg RFQ

15 Liquidity risks - Liquidity of ETF vs liquidity of underlying - Extraordinary or unlikely events may harm liquidity: Technical failure (exchanges) Event affecting the underlying market (e.g suspension) - Different time zones: trade as much as possible ETF when most of its underlying basket is open - Large order size compared to the ETF s assets: ask quotes for OTC trades to Market Makets, discuss holding ratio with Portfolio Manager - Illiquid or niche markets : internalise risk premium or trade at NAV In order to minimize transaction costs, ask advice to issuers and market makers to work the order the best way 15

16 16 Key take-aways - ETF enlarge the investment spectrum of retail investors by giving them access to restricted markets (Bonds, Emerging Markets) - The ETF ecosystem involves several parties: investors, Authorised Participants, Market Markers, Exchanges, issuers - Liquidity comes from two sources: primary and secondary markets - Different trading venues and order types depending on investment objectives - Engage with market participants to trade efficiently

17 17 How to trade ETF? Q&A

18 18 Investment risks The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Interest rate risk: The value of an investment may be affected by interest rate fluctuations. Interest rates may be influenced by several elements or events, such as monetary policy, the discount rate, inflation, etc. Credit risk: This is the risk that may derive from the rating downgrade of a bond issuer to which the sub funds are exposed, which may therefore cause the value of the investments to go down. Sub funds investing in high-yield bonds present a higher than average risk due to the greater fluctuation of their currency or the quality of the issuer. Counterparty risk: This risk relates to the quality of the counterparty with whom the management company does business, in particular for the settlement/delivery of financial instruments or the conclusion of financial forward contracts. The risk reflects the counterparty s ability to honour its commitments (payment, delivery, repayment, etc.). Liquidity risk: There is a risk that investments made in the sub funds may become illiquid due to an over-restricted ma rket (often reflected by a very broad bid-ask spread or by substantial price movements), or if their rating declines or their economic situation deteriorates. Derivatives risk: the use of derivatives by the funds includes various risks. Those risks are (without limitation), the lack of secondary market liquidity under circumstances, valuations risks, the lack of standardization and regulation, the risk of leverage, the risk of counterparty. Risk linked to equity markets: the risks associated with investments in equities (and similar instruments) include significant fluctuations in prices, negative information about the issuer or ma rket and the subordination of a company s equities to its bonds. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. For a Complete description and definition of risks, please consult the last available prospectus and KIIDs of the funds

19 Disclaimer This material is issued and has been prepared by THEAM* a member of BNP Paribas Investment Partners (BNPP IP)**. This material is produced for i nformation purposes only a nd does not constitute: 1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with a ny contract or commitment whatsoever or 2. any investment a dvice. This material makes reference to certain financial i nstruments (the Financial Instrument(s) ) authorised a nd regulated in its/their jurisdiction(s) of incorporation. No a ction has been taken whi ch would pe rmi t the publi c offe ring of the Financial Instrument(s ) in any othe r jurisdiction, except as indi ca ted in the mos t recent prospectus, offe ring document or any othe r information material, as applicable, of the relevant Financial Instrument(s) whe re such acti on would be re qui red, in particular, in the Uni ted Sta tes, to US persons (as such te rm is defined in Regulation S of the Unite d Sta tes Se curi ties Act of 1933). Prior to any subs cription in a country in which such Financial Ins trument(s ) is/a re registered, investors should veri fy a ny legal constraints or restrictions there may be in connection with the subscription, purchase, possession or sale of the Financial Instrument(s). Investors considering subs cribing for the Financial Instrument(s) should read carefully the mos t recent prospectus, offe ring document or othe r information material and consul t the Financial Instrument(s) most recent financial re ports. The prospectus, offeri ng document or othe r information of the Financial Instrument(s ) a re available from your local BNPP IP correspondents, if any, or from the entities marketing the Financial Instrument(s). Opini ons included in this material cons ti tute the judgment of THEAM at the ti me specified and ma y be subje ct to change wi thout noti ce. THEAM is not obliged to update or alter the information or opinions contained wi thin this material. Investors should consul t thei r own legal and ta x advisors in respe ct of legal, accounting, domicile and ta x ad vi ce prior to investing in the Financial Instrument(s) in orde r to make an independent de te rmina tion of the suitability and consequences of an investment the rein, if pe rmi tted. Please note tha t di fferent types of investments, if contained wi thin this material, in vol ve varying degrees of risk and the re can be no assurance tha t any specific investment ma y ei ther be sui table, appropriate or profitable for a client or prospective client s investment portfolio. Gi ven the economi c and ma rke t risks, the re can be no assurance tha t the Financial Instrument(s) will a chie ve i ts/thei r investment ob je cti ves. Re turns ma y be a ffected by, amongs t other things, investment strategies or ob je cti ves of the Financial Instrument(s) and material ma rket and economi c condi tions, including i nte rest ra tes, ma rke t te rms and gene ral ma rket condi tions. The di fferent stra te gies applied to the Financial Instruments ma y ha ve a significant effect on the resul ts portra yed in this material. Past performance is not a guide to future performance a nd the va lue of the i nvestments in Financial Instrument(s) may go down as well as up. Investors may not get back the amount they originally invested. The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption a nd taxes. This document is di re cted onl y at person(s ) who ha ve professional experience in ma tte rs relating to investments ( relevant persons ). Any investment or investment activity to whi ch this document relates is available onl y to and will be engaged in onl y wi th Professional Clients as defined in the rules of the Financial Se rvi ces Authority. Any pe rson who is not a relevant person should not act or rely on this document or any of its contents. *THEAM is an investment mana ger re gis te red wi th the Autori té des ma rchés financiers in Fra nce under number , a simplified joint stock company with a capital of Euros wi th i ts regis te red offi ce at 1, bouleva rd Haussmann Pa ris, France, RCS Pa ris and is member of the Association Française de la Ges tion Financière (AFG), a professional body for third-party a sset management in France. ** BNP Paribas Investment Pa rtne rs is the gl obal brand name of the BNP Paribas group s asset management se rvi ces. The individual asset management e ntities within BNP Paribas Investment Pa rtne rs if spe ci fied he rein, are specified for information onl y and do not necessarily carry on business in your jurisdiction. For further information, please conta ct yo u r locally licensed Investment Partner. 19

20 Presenters: ETFs 201: How To Trade ETFs AURELIEN CRISTINI ETF Trading, Europe BNP Paribas CIB GUIDO STUCCHI, CFA Head of ETF and Index Fund Management THEAM