Exchange Traded Funds

Structures, Mechanics and Investment Applications

Agenda Program
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Prague, NH Hotel Prague
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On completion of the course, the successful participant will be able to:
  • Contrast traditional collective investment vehicles (CIV's) with features of ETF's
  • Analyse the role of Authorized Participants in the creation and redemption process
  • Understand the role of securities lending as a form of income to ETF sponsors
  • Identify the chief risks associated with holding ETF's
  • Identify and analyse the special tracking error issues behind inverse and leveraged ETF's
  • Explain the nature of total return as applicable to the fixed income asset class
  • Explain the demise of ETF's that implemented short volatility strategies
  • Explain the critical behaviour of ETF's during flash crash episodes
  • Explain the importance of ETF's in inter-market strategies
  • Explain how bond-based ETF's have different behaviour to actual bonds
  • Describe the performance of various widely used smart beta ETF's
  • Identify risks for ETF's based on market capacity and liquidity issues
  • Explain the liquidity risks with ETF's that focus on emerging and frontier markets
  • Understand the regulatory and taxation issues that impact ETF's in the EU

Program of the seminar: Exchange Traded Funds

The seminar timetable follows Central European Time (CET).

09.00 - 09.10 Welcome and Introduction


Key Features of ETF's

  • Role of AP's in the creation/redemption process
  • Market micro-structure issues for ETF trading
  • Secondary market characteristics - liquidity issues
  • Treatment of dividends and other income generated in the underlying securities
  • Second order trading of ETF's - e.g. contracts for difference (CFD's) that reference ETF's
  • Expense ratio - the fee structure and how collected
  • Replication strategies - stratified sampling vs. full replication
  • Synthetic replication and counter party risk
  • Tracking Error - deviation from the performance of the underlying
  • Importance of fees earned from Securities Borrowing and Lending Intermediaries (SBLI's)
  • Detailed examination of the use of ETF's in inter-market trading strategies

Leveraged and Inverse ETF Products

  • The rationale for inverse ETF's - facilitates shorting of securities
  • Mechanics of inverse ETF's
  • Claims made by ETF sponsors regarding such products
  • Leveraging mechanics for equity-based ETF's
  • The constant leverage trap - how does this impact tracking?
  • Review of the major inverse and leveraged ETF's available to equity investors

Case Study

Discussion of impact of algorithmic and high frequency trading on liquidity in equity markets
Review of the CTFC/SEC report into the Flash Crash episode of May 2010
Approximately seventy percent of all cancelled trades during the flash crash were for ETF's

Regulatory and Taxation Issues for ETF's within the EU

  • Contrast between European-domiciled UCITS ETFs and US domiciled ETF's
  • Liquidity transparency of MiFID II disclosure requirements on ETF's
  • Withholding tax issues - reporting versus non-reporting funds
  • Key features of Packaged Retail Investment and Insurance Products - PRIIP's
  • Importance of consumer protection disclosures - KID's
  • Distribution model for different EU jurisdictions

12.30 - 13.30 Lunch


Total Return Fixed Income Products

  • Nature of the yield curve - term structure of interest rates
  • Total return characteristics - coupon plus capital gain/loss
  • Review of US Treasury ETF's
  • Special case of zero coupon fixed income instruments
  • Examination of EM bond ETF's
  • Explanation of how bond-based ETF's have different behaviour to actual bonds

Case Study

Using US Treasury based ETF's to trade the US government bond yield curve

Credit Quality Products

  • Distinguish between investment grade and sub-investment grade debt instruments
  • Explanation of credit quality and credit risk within the fixed income universe
  • Contrast between sovereign based bond ETF's and corporate based bond ETF's
  • Explanation and examples of a bond index
  • Review of ETF's which track investment grade corporate bond indices
  • Review of ETF's which track high yield corporate bond indices

Case Study

Liquidity issues with ETF's that are based on underlying high yield debt instruments
Examination of the features and performance of HYG and JNK

Commodity and Currency ETF's

  • Overview of the nature of FX markets and different investment vehicles
  • Overview of the nature of the commodity futures market
  • Review of ETF's which track foreign currencies - how they are constructed
  • Review of ETF's which track commodities - synthetic replication

Case Study

Risks with commodity ETF's that use synthetic replication - counter party risk


Workshop: Usage of ETF's in Portfolio Management

Active versus Passive Investment

  • Objectives and performance goals of portfolio managers
  • Distinguish between active and passive investment management
  • Examine the philosophy advocated by index tracking e.g. Vanguard's Bogle
  • Contrast the fees typically applied for active management
  • Using ETF's for diversification within an actively managed portfolio
  • Redemption gates and liquidity constraints within hedge funds

Case Study

Review of historical performance statistics for returns from active and passive fund managers

Equity Investment Style ETF's

  • Review of asset allocation strategies that are widely used by asset managers
  • Risk factor investment style
  • Value style versus growth style
  • Diversification styles - geographical and sector diversity
  • Essentials of performance attribution analysis

Smart Beta Strategies

  • Explanation of fundamentals of CAPM, risk and reward and beta
  • Review of the logic behind smart beta - risk factor asset allocation models
  • Examination of the performance of various widely used smart beta ETF's
  • Crowding and herding issues with smart beta strategies

Case Study

Are the promises provided by smart beta ETF sponsors warranted?

12.30 - 13.30 Lunch


Special Risks with ETF's

  • Market capacity issues - especially the underlying liquidity of ETF constituents
  • Liquidity risks with assets in emerging and frontier markets
  • Regulatory risk as policy makers focus on liquidity risk of structured products
  • Transparency risk with structured products e.g. MiFID 2
  • Capital controls in frontier markets
  • Counter party credit risk when ETF's use swaps and other derivatives

Case Study

Examination of ETF's that implement short volatility strategies including a detailed analysis of the demise of the Credit Suisse fund - XIV.

Implementing Hedge Fund Strategies with ETF's

  • ETF's which implement hedge fund strategies
  • Global Macro strategies - using global index ETF's, fixed income and currency ETF's
  • Long/Short strategies
  • Beta neutral strategies - portfolio construction techniques

Concluding Discussion

Examine the notion that, since the enormous growth in the ETF market place has occurred since the financial crisis of 2007/8, there remain important questions as to whether ETF's might pose systemic risk issues when the next financial crisis unfolds.

Training catalogue in PDF
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