Lecture 4: Exchange-Traded Funds

Transcription

1 Lecure 4: Exchange-Traded Funds Marco Avellaneda G Spring Semeser 2009

2 Srucure -- ETF: Invesmen vehicles, similar o funds bu ha look like socks -- raded on an exchange -- rading is similar o socks (long, shor, inraday rading, Reg T admissible) -- ETF: can be viewed as a holding company or a fund -- sared as index rackers -- 67% of invesmen professionals find ha ETFs are among he mos imporan financial innovaions of he las 20 years -- Srucure: auhorized paricipans can creae or redeem ETFs in creaion unis -- creaion unis: 25K o 100K shares -- APs ofen ac as marke makers, providing liquidiy

3 Hisory Milesones: 1993: firs US ETF 1998: firs European ETFs 2008: firs acively managed ETFs Hisory: 1989: Index Paricipaion Shares, sopped by Chicago Mercanile Exchange 1993: SPY Tracking S&P 500 (a.k.a. Spiders or SPDRS, issuer: Sae Sree) 1996: BGI creaes WEBS (World Equiy Benchmark Shares), laer called I-Shares 1998: Secor SPDRS rack 9 secors of he S&P : 680 ETFs in US wih 610B in asses, increase of 125B in 12 monhs

4 Main advanages -- Diversificaion a an affordable price -- Low expense raios -- Behave like index muual funds -- Limi orders, shor-selling, opions -- Lower fees -- Used for hedging by pros -- Tax efficiency: lower urnover han MFs (no need o sell asses each ime someone sells, less capial gains) -- No ``load (Enrance fees, or exi fees, like many muual funds)

5 20 mos acive US ETFs TICK ER DESCRIPTI ON AUM AVG VOL (3m) EX RATIO (bps) SPY 0.1 SP500 93B 366M 8 EFA MSCI Inl Eq 31B 36M 34 GLD Gold 0.1 oz 21B 13M NA EEM MSCI Emerging Mks. 19B 100M 72 IVV SP 500 I-Share 15B 7M 9 QQQQ Nasdaq 100 Index 1/10 12B 150M 20 IWM Russel B 77M 20 IWF Russel 1000 Growh 10B 8M 20 AGG Bond ETF 9.5B 0.7 M 20 IWD Russel 1000 Value 9.2B 7M 20 VTI Vanguard MSCI 1300 Socks 9.2B 11M 71 DIA Dow B 32M 14 TIP Inflaion-proeced bonds 8.6B 0.7M 20 XLF Financial SPDR 7.7B 200M 23 SHY 1-3 yr Treasurys 7.7B 1.3M 15 LQD IG Corporaes 6.9B 1.4M 15 MDY Mid-Cap SPDR 6.8B 10M 25 FXI China Xinghua B 43M 74 IWB Russel B 9M 15 EW J Japan 5.6B 32M 52

6 US Secor ETFs TICKER DESC AUM ($B) VOL ($M) LAST ($) XLF Financial SPDR XLE Energy SPDR OIH Oil Services HLDR XLK Tech IGE Naural Resources PHO Waer Resources XLP Consumer Saples XLV Healh Care XLU Uiliies MOO Agribusiness GDX Gold Miners PPH Pharmaceuicals PBW Clean Energy IYR Real Esae BBH Bioech HOLDRS XLI Indusrials SMH Semiconducors IYE Energy Ishare IBB Bioechnology na IYW Technology XME Meals & Mining RTH Reail RKH Regional Banks IYT Transporaion XLY Consumer Discreionary

7 Counry ETFs TICKER DESCRIPTION AUM ($B) VOL ($M) L AST ($) EW Z MSCI Brazil EW J MSCI Japan FXI Xinghua EW T Taiwan EW Y Korea EW C Canada EW H Hong Kong EW S Singapore RSX Mk Vecors Russia EW A Ausralia EW W Mexico

8 ETFs and PCA Facors Do he PCA facors ha we calculae wih, say, S&P 500 ``span he ETF universe? I = ETF price di I = N facors k =1 γ F +ς Ik k I How imporan are he residuals?

9 Regressing ETF on QQQQ Facors Using 11/2 years of daa, regress Bioech HOLDR, Semiconducors HOLDR Technology SPDR or firs 5 facors F1 F2 F 3 F4 F5 ERROR BBH SMH XLK Error= sum of squares of residuals in regression

10 ETFs as risk-facors Idea: use secor ETFs o explain sock reurns. ds S Nef = di k β Sk + ε S k =1 I k -- Unlike eigenvecors, ETFs can have srong correlaions -- Use sparse regression echniques o map sock o ETFs -- Use sock s secor o mach sock o ETF -- In case of several ETFs per secor, use liquidiy, highes R-squared

11 X Y 1,..., X N explanaory variables dependen variable 2 E( X i ) = 0, E( X i ) 2 ( ) = 0, E( Y ) = 1 E Y = 1 j(1) = arg max ε (1) = Y j Y, X Y, j(1) X X j = j(1) arg max j 1 T T = 1 Y X j Find larges inner produc Subrac projecion... j( n) = arg max ε ( n) = Y ε j ( n 1) ε, X ( n 1) j( n), X X j( n) j( n) X j( n) ; γ n = ε ( n 1), X j( n) Ierae, replacing Y by residuals... If ε ( n) ε ( n 1) 2 α sop Sop when gain is negligible β = Y i = N i= 1 { γ : j( m) = i} i m β X i + ς Maching Pursui Algorihm Gives sparse represenaion of Y in erms of explanaory variables

12 Comparing regression wih maching pursui of ETFs on eigenporfolios Using 11/2 years of daa, regress Bioech HOLDR, Semiconducors HOLDR Technology SPDR or firs 5 facors Regression F1 F2 F 3 F4 F5 ERROR BBH SMH XLK Maching pursui F1 F2 F 3 F4 F5 VARIANCE RATIO BBH SMH XLK

13 ALTR SMH ALTR BKX ALTR DFI ALTR XBD ALTR OSX ALTR SWH ALTR XNG ALTR XAL ALTR BBH ALTR DFX ALTR GHA ALTR GOX ALTR IXE ALTR IXI ALTR IXM ALTR IXT ALTR MSH ALTR OEX ALTR PPH ALTR QQQQ ALTR RKH ALTR TTH ALTR XAU ALTR XCI ALTR XOI ALTR OIH ALTR RTH ALTR UTH ALTR IXV ALTR DJX Alera Corp. ALTR Semiconducors

14 IVGN QQQQ IVGN IXI IVGN BBH IVGN UTH IVGN IXV IVGN GHA IVGN DFX IVGN TTH IVGN XOI IVGN MSH IVGN SMH IVGN BKX IVGN GOX IVGN IXE IVGN IXM IVGN IXT IVGN OEX IVGN OIH IVGN OSX IVGN PPH IVGN RKH IVGN RTH IVGN XAU IVGN XNG IVGN XBD IVGN XAL IVGN DFI IVGN SWH IVGN XCI IVGN DJX Invirogen Corp. IVGN QQQQ and IXI are broad indexes

15 MRK PPH MRK OIH MRK BKX MRK RTH MRK IXI MRK DFX MRK DJX MRK GHA MRK GOX MRK IXE MRK IXM MRK IXT MRK MSH MRK OEX MRK OSX MRK QQQQ MRK SWH MRK TTH MRK UTH MRK XAL MRK XCI MRK XNG MRK XOI MRK SMH MRK XAU MRK XBD MRK BBH MRK DFI MRK IXV MRK RKH Merck & Co. Inc. MRK Pharmaceuicals

16 Ticker ETF_Regressor Bea Residual FITB RKH FITB PPH FITB OSX FITB BKX FITB GHA FITB GOX FITB BBH FITB DJX FITB IXE FITB IXI FITB IXM FITB IXT FITB IXV FITB MSH FITB OEX FITB OIH FITB RTH FITB SWH FITB TTH FITB UTH FITB XAL FITB XAU FITB XBD FITB XCI FITB XNG FITB QQQQ FITB SMH FITB DFI FITB XOI FITB DFX Fifh-hird Bancorp FITB

17 Ticker ETF_Regressor Bea Residual GS XBD GS IXM GS TTH GS XOI GS OSX GS QQQQ GS BBH GS BKX GS DJX GS GHA GS GOX GS IXE GS IXI GS IXT GS IXV GS MSH GS OEX GS OIH GS RKH GS SMH GS UTH GS XAL GS XCI GS XNG GS XAU GS DFI GS SWH GS PPH GS DFX GS RTH Goldman Sachs Group Inc. GS

18 Comparing regression wih maching pursui of ETFs on eigenporfolios Using 11/2 years of daa, regress Bioech HOLDR, Semiconducors HOLDR Technology SPDR or firs 5 facors Regression F1 F2 F 3 F4 F5 ERROR BBH SMH XLK Maching pursui F1 F2 F 3 F4 F5 VARIANCE RATIO BBH SMH XLK