The physical gold

collateral inventory held

by SPDR for the GLD
ETF: 899.99 tonnes worth
$37 881 090 419 57 as of
$37,881,090,419.57
2:00 PM PST, October 6,
2013.
See
http://www.spdrgoldshares.com
USA

ETPs: Exchange Traded Funds

The hottest game in town
2010-2013, Gary R. Evans. May be used only for non-profit educational use without permission of the author.

For ETPs, we rely upon Chapter 6!

Chapter 6 is very detailed, technical, and important. This lecture is just an
introduction. ETPs are so important in the future that I expect you to understand
them as explained in that chapter, including their limitations. Try to understand:

1
2
3
4
5
6
7
8
9

Difference between direct (long), inverse, and leveraged

Purple terms
Primary ways different ETPs are collateralized (or not - ETNs)
What is a delta fund?
How was USO collateralized?
Distinction between the true tracking issues (p
(p. 8)
Summary of research steps
Flash crash warnings
The grim message of Appendix B

ETPs instead of mutual funds

You can build a "mutual fund" portfolio with ETPs that match
these funds
Can be bought and sold just like stocks, and you can trade in
and out of them quickly without penalty.
Taxed like stocks big advantage!! Some exceptions!
Price tracks throughout the day
Fees may be slightly higher, but also can be lower.
Many inverse and leverage funds available, designed to move
in opposite direction of stocks, indexes, or commodity prices.
You can invest in the prices of some commodities as well, like
oil, gold, and silver.
Fees are simply collected from collateral inventory (which can
have a slight long-term impact on the tracking price).

The Net Asset Value (NAV) issue

The NAV of any mutual fund or ETF is the total value of the
collateral assets owned by the fund (weighted price times
quantityy divided by
q
y total shares outstanding.
g
Mutual Fund: The NAV of is calculated each day at 4:00 PM
(market close) and all buy and sell trades are executed in the
evening at that NAV price.
ETP: The price of an ETP is determined by supply and demand,
not the NAV, even though for most the iNAV is calculated and
published frequently throughout the day, and some funds do not
track the iNAV all
ll that
h well
ll andd some have
h
a consistent
i
bias
bi at
premium or discount!
Implication: When researching an ETF thorough its prospectus,
always evaluate the premium/discount to NAV!!

A REPRESENTATIVE SELECTION OF EXCHANGE TRADED FUNDS

Domestic Index
DJIA
DIA
S&P500
SPY
RUSSELL 2000
IWM
NASDAQ 100
QQQQ
RUSSELL MIDCAP IWR
Global Index
AUSTRALIA
EWA
BELGIUM
EWK
BRAZIL
EWZ
CANADA
EWC
DOW JONES EURO FEZ
FRANCE
EWQ
GERMANY
EWG
HONG KONG
EWH
ITALY
EWI
JAPAN
EWJ
MEXICO
EWW
SINGAPORE
EWS
SOUTH AFRICA
EZA
SOUTH KOREA
EWI
SPAIN
EWP
TAIWAN
EWT
UNITED KINGDOM
EWU

Commodities and Metals

GOLD
GLD
SILVER
SLV
U.S. OIL
USO
Financial Assets
UST 20-YR BOND
TLT
UST 7-10 YR NOTE IEF
UST 1-3
1 3 YR NOTE
SHY
UST TIPS
TIP
US CORP BOND
IQD
Technology Specialty
BROADBAND
BDH
INTERNET
BHH
NANOTECH
PXN
NASDAQ 100 TECH QTEC
SEMICONDUCTOR IGW
SOFTWARE
IGV
Other Specialty
ENERGY
XLE
HEALTHCARE
XLV
US OIL & GAS
IEO
FINANCIAL
XLF
US REAL ESTATE
IYR
UTILITIES
IDU

... and this is just a

tiny sample. Online
ETF screeners are
everywhere now, so
it is easy to find a
dedicated ETF for
your investment
needs.

Funds that track indexes

Funds that track the actual prices of commodities (not companies)
Funds that track the prices of these financial assets (not companies)
Market baskets of stock in these industries (typically with an index)

Index Long and Short ETFs

Index Long & Short ETFs
Index
DJIA
S&P500

Long
g
DIA

SPDR Small Cap

SPY
IVV
DSC

p 400
S&P Mid Cap

MDY

NASDAQ 100

QQQQ

Russell 2000

IWM

Short
DOG
DXD
SH
RSW
SBB
SDD
MYY
RMS
PSQ
QID
RWM
TWM

The Ultra-shorts are shown

in yellow. These are 2X
short
h t ETFs.
ETF
There are also short ETFs
in Treasuries and other
YBFAs, currencies, many
commodities, and nearly all
classes and sectors of
equities.
Increasingly, 401-K and
other retirement accounts
are letting you trade ETFs
in addition to mutual funds.

Index ETP Price Ratios

(October 9, 2013)

Index/Commodity
DJIA
S&P500
RUSSELL 2000
NASDAQ 100
GOLD
U.S. OIL

ETF
DIA
SPY
IWM
QQQ
GLD
USO

Same-time quotes
Ratio
Index
ETF
1/10 14,802.98
147.78
1/10 1,656.40
165.60
1/10 1,043.46
103.64
1/40 3,142.54
3 142 54
76 98
76.98
1/10 1,304.80
126.11
N/A
36.55

For some, like GLD, this relationship decays over time because of fees
This is not undesirable. All that matters is that the price accurately
tracks the NAV.

To make their pprices attractive,, ETPs are typically

yp
y priced
p
at some even fraction
of their indexes, as shown above. As can be seen by the prices, the ETPs don't
track the indexes perfectly; there is usually an error of around 1%. Also over
time as fees are deducted the ratio can decay, as it has done for GLD. This is
not undesirable so long as the stock price accurately tracks the NAV!

The S. Korean ETF (EWY) in recent years

iShares MSCI South Korea Capped ETF
I pplayed
y right
g in here

but there is exchange rate risk!

... and warning ... the Mysterious Orient!

Samsung is 22% of
assets in Fall 2103!

The Japan ETF (EWJ) benefits from

Abenomics devaluation in December 2012
iShares MSCI Japan Index ETF
New Japanese PM Shinzo Abe engineers
severe devaluation of the Yen in December
2012, promoting domestic inflation and
huge improvements to corporate profits.

Collateralizing ETPs
All exchange traded products collateralize their value by holding
securities or commodities (depending of course upon the type of
fund) in an amount roughly equal to the market value of the
shares of the ETP in circulation. For example, the title slide
showed a picture (and stated the value) of the physical gold that
is held by StreetTrackers for their popular GLD ETF.
The collateral is typically held in the form of (1) a market
basket of securities (such as those that would make up a global
) ((2)) a futures or forward contract or pportfolio of
index fund),
futures contracts, including some for physical commodities (like
USO), and (3) inventories of physical commodities (like GLD).
The method of securing collateral is always described in the ETF
prospectus and is something you must review.

DWBH!

Releasing ETP shares through units

Source: Investment Company Institute, 2013 Investment Company Factbook, 53rd ed.

How the ETF enters the market

Problem: As general demand grows for the ETF, popularity has the
potential to pull the price above the tracking price that the ETF is
supposed to follow (and if the fund becomes less popular, the sellp
the trackingg pprice below).
)
off could ppush the price
Usually the fund sells blocks of the ETF, often called units, to
distributors who are essentially specialized market makers (often
the same companies) at a price that is slightly advantageous to the
markets. The distributors then sell off their inventory to the
markets as demand grows. For liquid ETFs (not all are) arbitrage
tends to keep the prices more or less in line.
line
The proceeds from these unit sales are invested in collateral. For
the GLD ETF, StreetTraks requests payment in gold!
The collateralization of these ETFs is known to be responsible for
surging demand in commodities like gold!

How arbitrage is supposed to keep the

GLD ETF at the correct price (iNAV
(iNAV))
P
128.42 Gold
126.6 Ask
126.5 Bid

S
Suppose Gold is trading
such that the iNAV is
128.42. How does this
present an arbitrage
opportunity?

Vol
Basically take a long position in this and possibly use a futures contract to
short gold, profiting as the spread narrows.

Source: Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, Preliminary
Finds Regarding the Market Events of May 6, 2010.

ETFs during the Flash Crash

many stocks, like Accenture, went

down to the stub quotes

but so did many of the ETFs, like

IWM. They recovered, but if you had
stops, you were royally @%$&*%@!

Shopping for ETPs

Because of flash crash, some advisors are warning against using these instead
of mutual funds for sizeable long-term investments, so, if you are going to use
them, do your research with data sheets (online) and prospectus!! Bottom line
may be that these are not perfect replacements for mutual funds.

To check:

The stated investment objective (of exactly what they claim to track).
How the fund is collateralized

direct market basket of asset or asset

direct portfolio that matches an index
futures or other derivatives (beware for LT investments)

Does the NAV track the investment objective? And

Is the fund tracking the NAV
NAV, or is it at premium or discount
discount, and how much?
Compare the fund for daily volume to competing or similar popular funds
volume at a small fraction of a popular fund is typically a red flag especially
for larger Long-Term investments.
The reading (Chapter 6) has much more detail about this.

Q: How do you get (a) inverse, (b) leverage,

(c) delta? A: Use futures contracts

USO is a
delta fund:
However, we really
cant explain this
until we study
futures contracts, so
we get to this .....
The issue??:
Target iNAV -- Price

TLT, the UST long

long--bond
bellwether

Figure 4
TLT: Barclays 20+ Year Treasury Bond Fund
Portfolio Composition on October 25, 2012

NAV:
Maturity

Also ahead of us ... the

inverse relationship
between interest rates and
these market value.

122.16
Years

Shares Out:
Market Value

5/15/2041
/ /
2/15/2040
11/15/2040
5/15/2040
2/15/2041
8/15/2040
8/15/2041
11/15/2039
8/15/2039
11/15/2041
5/15/2039
2/15/2039
5/15/2042
2/15/2042
8/15/2042
2/15/2038
5/15/2038
TotalBonds
Blackrockfund
Other*
TotalAssets

28.5644
27.3178
28.0685
27.5644
28.3205
27.8164
28.8164
27.0658
26.8137
29.0685
26.5616
26.3178
29.5644
29 3205
29.3205
29.8164
25.3178
25.5616

Weighted AV**

27.8923

260,992,247
253,985,962
251,751,467
246,531,741
245,938,304
239,926,830
236,122,896
231,423,502
175,376,175
167,521,522
165,761,442
128,178,483
126,698,738
123 318 012
123,318,012
77,696,213
58,355,665
34,202,238
3,023,781,437
334,768
66,567,413

3,090,683,618

25,300,000
%

8.44
8.22
8.15
7.98
7.96
7.76
7.64
7.49
5.67
5.42
5.36
4.15
4.10
3 99
3.99
2.51
1.89
1.11
97.84
0.01
2.15
100.00

Coupon

YTM

Price

4.38
4.62
4.25
4.38
4.75
3.88
3.75
4.38
4.50
3.12
4.25
3.50
3.00
3 12
3.12
2.75
4.38
4.50

2.88
2.84
2.87
2.86
2.86
2.88
2.91
2.84
2.83
2.95
2.84
2.86
2.97
2 95
2.95
2.98
2.80
2.81

128.95
133.73
126.40
128.82
136.48
118.92
116.27
128.75
131.14
103.49
126.23
111.75
100.69
103 37
103.37
95.44
128.31
130.76

0.08

0.08

1.00

4.07

2.88

122.70

* Other is mostly dividends receivable from bond holdings.

**Weighted average of bonds only.
Source: iShares online prospectus for iShares 20+ Year Treasury Bond Fund, this date.