An interesting article in Bloomberg tdaoy, Almost Entire $8 Trillion ETF Market Hinges on a Few Key Firms - Bloomberg.
As a Canadian investor there is no access to Vanguard mutual funds so the only option is using low-cost, broad-based index ETFs. As a general policy I try to avoid trading in the first and last half-hour of the markets and always try to the the ETF's NAV and use limit orders to ensure I maintain at least some control over my bids and asks.
For those interested in digging deeper, the Bloomberg article points to this research paper on how the ETF market pricing works in the US. Two APs Are Better Than One: ETF Mispricing and Primary Market ParticipationIn the past five years US ETF market assets have more than doubled, over 1,000 new funds launched, and annual trading volumes jumped by around $11 trillion. Yet there has been one exception to the explosive growth: The ranks of firms responsible for steering cash in and out of every product.
This cohort — known as authorized participants, or APs — are a type of broker-dealer indispensable to the smooth functioning of every exchange-traded fund in North America. But as the industry has swollen, their numbers have barely changed. In fact, the most active APs have been increasing their market share, strengthening a remarkable concentration in the underbelly of the now-$8 trillion arena.
Bloomberg News analyzed filings for more than 3,400 funds to show that, despite the industry’s breakneck expansion, more than half of all US ETF flows are handled by just three firms. For a majority of funds, more than 90% of all money entering or exiting funnels through three APs or fewer.
The Bloomberg articles cites the research paper and provides some caution for us retail investors about the potential impactAbstract
Exchange-traded funds (ETFs) depend on arbitrageurs to correct deviations between a fund’s price and its fair value. ETFs have designated brokers, or authorized participants (APs), who have a unique right to create and redeem ETF shares, and who can thus trade on ETF mispricing without risk. Using novel regulatory filings, we provide the first description of the US ETF-AP network. It has a dense core and a sparse periphery, and the observed creation/redemption volumes are highly concentrated. The level of mispricing in a US equity ETF is negatively related to the fund’s network diversity, especially during times of high market volatility. Funds that share more APs exhibit stronger mispricing comovement. We theoretically show that diverse networks help mitigate the effect of shocks to AP-specific arbitrage costs. We highlight the importance of AP balance sheet usage costs in ETF markets by exploiting the Federal Reserve’s purchases of bond ETFs in 2020.
As a buy and hold investor who doesn't actively trade ETFs (or anything else) and who sticks to only the big, broad-based and low-cost ETFs I don't believe this has much, if any, impact to when I'm making trades.“Our message is that investors and retail traders have to be aware of this,” said Taisiya Sikorskaya, a PhD candidate at London Business School who co-authored Two APs Are Better Than One: ETF Mispricing and Primary Market Participation. “This mispricing that we find exists exactly in times when investors would like to rebalance, would like to fly to safety.”
For most retail traders, the mispricing may not be immediately apparent since AP activity and a fund’s deviations from its assets often happen out of most investors’ sight. ETFs have become popular in part because they’re considered low-cost and efficient, yet in a market meltdown these attributes can fade — and a lack of APs exacerbates the problem.
As a Canadian investor there is no access to Vanguard mutual funds so the only option is using low-cost, broad-based index ETFs. As a general policy I try to avoid trading in the first and last half-hour of the markets and always try to the the ETF's NAV and use limit orders to ensure I maintain at least some control over my bids and asks.
Statistics: Posted by Peculiar_Investor — Fri Dec 15, 2023 7:27 am — Replies 2 — Views 185