Tag Archives: exchange-traded funds

Three myths about trading Fixed Income ETFs

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Michael Barrer

By Michael Barrer, WisdomTree Capital Markets

Special to the Financial Independence Hub

Fixed income exchange-traded funds (ETFs) provide the investing world with transparency in an otherwise opaque asset class. Although launched in 2002, fixed income ETFs did not become mainstream until 2008, and today these funds are often considered the growth engine for the ETF industry. However, because of the over-the-counter nature of the fixed income market and the fact that ETFs with fixed income underlying securities were adopted later than their equity-based relatives, there are still myths around the trading and liquidity profiles of these funds. I want to address these myths and explain the realities of the fixed income ETF structure.

Myth 1: Fixed income ETFs are not liquid, and on-screen volume equals ETF liquidity

Reality: ETFs are just an exchange-traded wrapper around a basket of securities. The minimum liquidity available of the ETF is defined by the liquidity of the underlying securities. With equity ETFs, the volume of the underlying securities can be measured and tracked. Implied liquidity is an industry standard metric that quantifies basket liquidity in equity-based ETFs.

In the fixed income market, the over-the-counter trading nature and lack of centralized trade reporting make quantifying fixed income ETF liquidity more challenging. That being said, there is a basic industry practice that assumes 5% of an outstanding issue will turn over daily and a conservative estimate to avoid market impact is to not be more than 25% of that daily turnover.

We recently discussed this subject in a separate blog post, where we quantified the potential daily liquidity in our new “Smart Beta” fixed income strategies. The bottom line remains that fixed income ETFs are designed with liquidity in mind, so they can scale, and the minimum liquidity available will always be based on the liquidity of the underlying asset class. On-screen volume only acts as an additional layer to the overall liquidity profile of the ETF.

Myth 2: Fixed income ETFs have wide spreads

blog-see-more-fixed-incomeReality: The spread of an ETF is a representation of the spread in the underlying asset class, plus the costs and risks associated to the market maker. The exchange-traded and transparent nature of ETFs allows investors to see these spreads in real time. Whereas in a mutual fund, the portfolio spread would mirror that of an ETF with similar characteristics, however, the mutual fund structure does not allow for this level of intraday transparency.

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Appetite for ETFs to keep rising in 2017: BlackRock

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Head of iShares Warren Collier (CETFA.ca)

The popularity of exchange-traded funds (ETFs) in Canada continues to surge and 31% of domestic investors now report they own ETFs, says BlackRock Canada’s first-ever ETF Pulse Survey, released Friday.

Furthermore, 93% of existing ETF owners and 38% of non-owners are interested in buying ETFs in the next 12 months. The survey suggests education plays a big role in the adoption of ETFs: more than half of Canadian investors plan to learn more about ETFs in 2017 and non ETF investors are more than twice as likely to seek out more ETF knowledge next year.

41% are replacing mutual funds with ETFs

Not surprisingly, the survey found that 41% of investors polled are choosing ETFs largely to replace mutual funds while 45% are doing so to replace individual stocks. Improved diversification was cited by 53% while 43% felt ETFs would help reduce their risk profile. BlackRock added that these findings are consistent with a Greenwich Survey of Canadian institutional ETF users, which pointed to a rise in ETF allocations among institutional investors in the coming year.

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When to buy an ETF for maximum return

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To determine when to buy an ETF, some investors use technical analysis and other tools. But you need to dig deeper.

ETF-25Y-medallion-ROUND-ENInvestors often wonder: what is a good entry point when purchasing a stock or an ETF?

The first question before asking when to buy an ETF is whether an exchange traded fund investment is right for your portfolio. An ETF investment is one of the most popular and most benign investing innovations of our time. ETF investments are a little like conventional mutual funds, but with two key differences.

First, ETF investments trade on a stock exchange throughout the day, much like ordinary stocks. So you can buy them through a broker whenever the stock market is open, and generally you pay the same commission rate that you pay to buy stocks. In contrast, you can only buy most conventional mutual funds at the end of the day. What’s more, commissions vary widely, depending on negotiations with your broker or fund dealer.

Second, the MER (Management Expense Ratio) is generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

When to buy an ETF

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Weekly Wrap: MoneySense’s 2016 ETF All-Stars; BMO and Horizons ETF Outlooks for 2016

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ETF word on the green enter keyboard image with hi-res rendered artwork that could be used for any graphic design.Lots of ETF developments to report as we close out January. The February/March 2016 issue of MoneySense magazine includes the latest edition of a feature I spearheaded called the ETF All-Stars.

The focus is on low-cost broadly diversified “plain-vanilla” ETFs but we also included several “Satellite” picks, some of them low-volatility products covering Canada, the US, EAFE and Emerging Markets.

Our six panelists strive not to change  the “All-star” lineup too often, since the idea is to minimize turnover and taxes, while having low-cost portfolios that can be bought and held over the proverbial long run. Even so, each year there there are inevitably a few substitutions and replacements and this time around we modestly expanded the number of “All-Stars.”

BMO’s ETF Outlook 2016

Meanwhile on Friday, BMO Global Asset Management released its ETF Outlook 2016. It noted the ETF industry had another record-breaking year in 2015: globally it grew to more than US$2.9 trillion as of December 2015, with a record US$372 billion in new assets the last year.

The Canadian ETF industry also had an historic year, with a record $C16.3 billion in inflows, and assets hitting just under $C90 billion, which is twice as much as five years ago.

Market volatility and ETFs

The report reprises the market volatility of 2015, notable the China-centric selloff of August 24, the surprise non-hike of interest rates by the Fed on Sept. 16th, and its finally raising them by 25 basis points on December 16. And of course there was the continued slide in the price of oil, which hurts resource-based economies like Canada.

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