CONTRIBUTORS
David Mann
Head of Capital Markets, Global Exchange-Traded Funds (ETFs), Franklin Templeton Investments
During the month of March, David Mann, Franklin Templeton’s head of Capital Markets, Global Exchange-Traded Funds (ETFs), presented a series of ideas to help improve ETF market structure, and asked readers to vote on the ones they liked best. He presents the winning idea: Delayed ETF Openings, and also answers some recent questions from readers.
Thanks for all of your votes and interest in our “Market Structure Madness” tournament! After several matchups, I am proud to announce our champion.
Congrats to Delayed ETF Openings! Its premise to improve market structure is very simple: New ETFs would not be opened for trading until an agreed-upon spread has been reached.
As I conclude the series with this final post, I thought I’d address some of the questions and comments that I received during the competition:
Q:How will these ideas be circulated to the exchanges?
We are in frequent conversation with the listing exchanges where ETFs trade on ways the ETF experience can be improved, and will make sure this one is added to the agenda. (In fact, we will probably mention the other ideas as well.)
Q:Does anything ever change?
Although change doesn’t happen instantaneously, it can happen, and we appreciate your input. We have talked about the possibility of an ETF Rule within this blog for over a year, and the chatter seems to be that something is likely to happen this year.
For a small example, one issue that had arisen about newly listed ETFs was that on days when an ETF did not trade, its official closing price would be the closing price from the previous trading day. That can cause excessive premiums and discounts between the ETF’s last price and its net asset value (NAV)1, if the ETF does not trade on a day with a significant market move. To address this issue, NYSE Arca recently filed for a new rule change that would use an ETF’s bid/ask spread to determine its last price on days when there is no trading. We think that should be a far more accurate gauge than whatever happened in the markets the previous day.
Q:Can I submit my own idea?
Keep those ideas coming! I will be more than happy to expand on your idea in more detail. For example, one blog reader suggested adding a requirement to increase the depth of an ETF’s order book. That is certainly a topic I can revisit in this forum at a later date.
Q:Which market structure idea were you rooting for to win?
I think the voters got this one right, but I would have been just as happy to see the NAV trading order type prevail. For many buy-and-hold investors, the intraday trading element of ETFs is far less relevant, especially for those investors who are more comfortable using mutual funds. In my view, trading an ETF based on NAV would be a great interim step for mutual-fund users not familiar with trading stocks.
Q:Could an improved market structure ultimately eliminate the possibility of bad ETF trades?
Only time will tell what the future of ETF market structure will look like. We have spent much time and focus over the past month on potential market-structure changes that could either help limit the extent of bad trades (ETF circuit breakers being one potential solution) or simply make it easier to trade them (such as ETF NAV order type). It should not be forgotten that it’s also possible to prevent “bad” trades at the time of order entry. I think following some simple best practices for trading ETFs can certainly help achieve that goal.
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David Mann’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
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1. Net Asset Value (NAV) represents an ETF’s per-share-value. The NAV per share is determined by dividing the total NAV of a fund by the number of shares outstanding. The fund calculates the NAV per share each business day as of 1 p.m. Pacific time, which normally coincides with the close of trading on the New York Stock Exchange (NYSE) and BATS BZX Exchange (BATS). The fund does not calculate the NAV on days the NYSE and BATS are closed for trading. If the NYSE and BATS have a scheduled early close or unscheduled early close, the fund’s share price would still be determined as of 1 p.m. Pacific time.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.