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Exchange Traded Funds (ETFs) Library

Exchange Traded Funds have grown rapidly over the years. To be sure, ETFs provide outstanding vehicles for investors to express views across a wide range of asset classes. Yet, some fear underlying systemic risk and an added potential for market disruptions. In contrast, others highlight limited growth in trading volumes from 23% of total equity trading in 2013 to 28% in 2019 as well as an ecosystem of Authorized Participants (APs) and market makers to support seamless trading. Based on a survey of a wide range of highly knowledgeable participants in academia, investment management, and banking, deep uncertainty regarding the role of ETFs on corporate bond market liquidity is extremely high. A full 68% of those surveyed by CFS offered no opinion regarding the role of ETFs on market liquidity. Of the remainder, 21% believed that ETFs added to liquidity risks into the future, while 11% noted that ETFs enhance corporate bond market liquidity conditions. More knowledge on ETFs and their impact on the financial system is vital.

ETF library contents are divided into:

  • Analysis of Risks and Markets
  • Policy and Regulation

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ETFs Library
Analysis of Risks and Markets
Jul 01, 2020 Lessons from Covid 19: European BBB Bonds and Fallen Angels
Barbara Novick, Souheir Asba, Joanna Cound, Adam Jackson, Pierre Le Bihan, Patrick Liedtke (Featured in BlackRock's publication ViewPoint)
The COVID-19-related economic shutdown measures have changed the outlook for corporate issuers, resulting in a sharp uptick since the start of the year of bonds being downgraded from Investment Grade to High Yield (aka 'fallen angels') across Dollar, Euro, and Sterling markets. These papers provide context on historical shifts and developments in each market, and highlight the flexibility or willingness of many investors to hold or purchase downgraded securities, dampening cliff-edge effects.
Jul 01, 2020 Lessons from Covid 19: U.S. BBB Bonds and Fallen Angels
Barbara Novick, Stephan Bassas, Sam Brindley, Douglas Oare, Kashif Riaz, Midori Takasaki (Featured in BlackRock's publication ViewPoint)
The COVID-19-related economic shutdown measures have changed the outlook for corporate issuers, resulting in a sharp uptick since the start of the year of bonds being downgraded from Investment Grade to High Yield (aka 'fallen angels') across Dollar, Euro, and Sterling markets. These papers provide context on historical shifts and developments in each market, and highlight the flexibility or willingness of many investors to hold or purchase downgraded securities, dampening cliff-edge effects.
Jul 01, 2020 Lessons from Covid-19: ETFs as a Source of Stability
Barbara Novick, Samara Cohen, Stephen Fisher, Samantha Merwin, Midori Takasaki, Rajat Tiwari, Sander van Nugteren, Jason Warr (Featured in BlackRock's publication ViewPoint)
Exchange-traded funds (ETFs) demonstrated their role in providing a second source of liquidity and contributing to price discovery during the most volatile weeks in March. As liquidity in underlying markets deteriorated during the selloff, especially in fixed income, ETFs continued to trade efficiently and investors increasingly turned to ETFs to efficiently rebalance holdings, hedge portfolios, and manage risk. We recognize as well a few areas where additional improvements can be made to bolster the strength and resiliency of the ETF market.
Jul 01, 2020 Lessons from Covid-19: U.S. Municipal Bond Market
Barbara Novick, Chen Ali, Rachel Barry, Sean Carney, Kate Fulton, Peter Hayes, Michael Huang, Philip Sommer (Featured in BlackRock's publication ViewPoint)
During the COVID-19 crisis, the U.S. municipal bond market came under pressure, which reflected both general market conditions and concerns about the finances of municipalities in light of the impact of COVID-19 on both revenues and expenses. The latter concern led to selling pressure in both individual bonds and via redemptions from municipal bond funds, which peaked in March 2020. In this paper, we explore the U.S. municipal bond ecosystem during the crisis, the Federal response to provide assistance, and liquidity risk management techniques used in municipal bond funds.
Jul 01, 2020 Lessons from Covid-19: U.S. Short-Term Money Markets
Barbara Novick, Tom Callahan, Samantha DeZur, Kate Fulton, Tom Kinnelly, Tricia Meyer, Jerry Pucci, Jonathan Steel (Featured in BlackRock's publication ViewPoint)
Due to the demand for cash and highly liquid assets across market participants, short-term markets froze and governments and central banks globally acted swiftly to help ensure the continued functioning of markets. The COVID-19 crisis showed that while many of the regulatory reforms implemented after the 2008 financial crisis benefitted the markets, more work needs to be done ahead of future stress events. We recommend a holistic approach with three pillars: commercial paper market structure, banks as intermediaries, and money market fund reforms.
Jul 01, 2020 Lessons from Covid-19: Fixed Income Index Rebalancing
Barbara Novick, Joanna Cound, Kate Fulton, Adam Jackson, Alan Mason, James Mauro, Midori Takasaki, Carolyn Weinberg, (Featured in BlackRock's publication ViewPoint)
In March 2020, stresses in the fixed income markets and operational concerns around new work-from-home (WFH) policies led to concerns about the scheduled fixed income index rebalancing. In this paper, we discuss index providers' decisions to delay rebalancing until the end of April 2020 which helped to preserve market liquidity during the March turbulence, avoid central bank interventions being undermined, and prevent unnecessarily large transaction costs for end-investors.
Jul 01, 2020 Lessons from Covid-19: The Experience of European MMFs in Short Term Markets
Barbara Novick, Tom Callahan, Matt Clay, Joanna Cound, Carey Evans, Mike Eberhardt, Beccy Milchen (Featured in BlackRock's publication ViewPoint)
Due to the demand for cash and highly liquid assets across market participants, short-term markets froze and governments and central banks globally acted swiftly to help ensure the continued functioning of markets. The COVID-19 crisis showed that while many of the regulatory reforms implemented after the 2008 financial crisis benefitted the markets, more work needs to be done ahead of future stress events. We recommend a holistic approach with three pillars: commercial paper market structure, banks as intermediaries, and money market fund reforms.
May 13, 2020 CFS Survey of Investors, Bankers, and Academics: Corporate Bond Market Liquidity and Exchange Traded Funds (ETFs)
The Center for Financial Stability
Opinion on Exchange Traded Funds (ETFs), U.S. corporate bond market liquidity, and potential financial stability consequences is often amorphous and challenging. Strongly differentiated opinions existed among knowledgeable observers. Hence, CFS surveyed highly knowledgeable participants in academia, investment management, and banking via targeted outreach.
Mar 12, 2020 Bond ETFs Face Toughest Liquidity Test Yet in Virus Turmoil
Katherine Greifeld (Bloomberg Markets)
Bond ETFs are highlighting signs of liquidity stress in broader markets, with cash prices trading at persistent and deep discounts to the value of the underlying assets.
Feb 2020 Comment on the CFA Institute Research Foundation’s paper, “ETFs and Systemic Risks”
Barbara Novick and Samantha Merwin (BlackRock)
The CFA Institute Research Foundation recently published a paper by Maureen O’Hara and Ayan Bhattacharya (“ETFs and Systemic Risks”) that reprises many common misconceptions about ETFs and, critically, does so without presenting new empirical evidence to support these claims. Over the past few years, a series of market events have provided data showing how ETFs perform. In addition, regulators have introduced new rules for reporting data which provides additional insights. This paper, authored by Blackrock’s Barbara Novick and Samantha Merwin, incorporates market experience and regulatory data to rebut the arguments in the CFA Institute Research Foundation’s paper.
Feb 01, 2020 A Global Perspective On Market-On-Close-Activity
Barbara Novick, Ananth Madhavan, Hubert De Jesus, Daniel Mayston, Stephen Fisher, Jason Warr, Smantha Merwin, Midori Takasaki (Featured in BlackRock's publication ViewPoint)
A look at the issues raised around heightened market-on-close (MOC) activity by identifying key drivers behind this proliferation and demonstrating that this growth is not a cause for concern. In fact, the growth of closing auction volumes has amplified its critical role as a forum for deep liquidity and accurate price discovery, thus providing greater market stability and investor protection.
Jan 15, 2020 Do Fund Flows Lead to Fire-sales and Pose Systemic Risk?
Rochelle (Shelly) Antoniewicz, Christof W. Stahel (Investment Company Institute)
Assessing systemic risk of mutual funds as a result of liquidity transformation is difficult because the frequency of flow and holdings data available is too low to properly isolate the price impact of redemption-driven sales of portfolio assets. Exchange-traded funds (ETFs) offer the advantage of daily observations of redemptions as well as the exact assets which might be sold in the underlying market. Exploiting this advantage, we show for extreme redemptions from individual corporate bond ETFs during normal times and stressed markets as well as for the largest aggregate redemptions from all corporate bond ETFs that the concern of systemic risk is not supported by the data. For the most extreme daily redemptions between 2009 and 2017, we find that for many bonds received in-kind for ETF shares, customer sell volumes in excess of average past daily customer sell volumes are either negative or large multiples of the maximum potential redemption implied sale of bonds. Further, we show that among the bonds with positive excess customer sell volumes, the extreme redemption implied sale of bonds relative to the standard deviations of past daily customer sell volumes was large for only very few of them. Corroborating the results, using regression analyses we find no evidence that extreme redemption implied sales of bonds led to abnormal negative price impacts in the underlying bond market. These findings imply that extreme redemption implied asset sales in the corporate bond market have not triggered wide-spread fire sales.
2020 ETFs and Systemic Risks
Ayan Bhattacharya and Maureen O'Hara (CFA Institute Research Foundation)
This paper is organized as follows. Section 2 discusses four recent episodes of market disruption involving ETFs. Section 3 provides a brief overview of the structure of an ETF. Section 4 examines the academic theory behind coordination and speculative herding in ETF markets, as well as the market conditions under which herding is likely to be severe. Section 5 discusses some of the systemic risks that may relate to ETFs’ particular design and considers whether ETF scan be a source of market disruption. Section 6compares various tools a regulator can use to deal with episodes of market disruption and draws attention to some emerging risks in ETFs. Section 7 recaps our main findings and provides recommendations for regulators. Section 8 concludes this paper by asking whether we have the right “rules of the road” to deal with the new drivers of market behavior.
Aug 2019 Fixed Income ETFs: Primary Market Participation and Resilience of Liquidity During Periods of Stress
Matteo Aquilina, Karen Croxson, Gian Giacomo Valentini and Lachlan Vass (Featured in The Financial Conduct Authority, Research Note)
In this research paper, the authors discuss how the rapid growth in exchange-traded fund (ETF) markets creates potential risks to investor protection and financial stability. Using a unique transactions dataset, they present initial facts about participation in ETF primary markets and their preliminary analysis of the behavior of liquidity providers in times of stress. They find ETF primary markets are highly concentrated, particularly for fixed income ETFs, where concerns about 'liquidity mismatch' have been raised. However, their preliminary analysis of stress events provides some evidence that alternative liquidity providers ’step in’ during times of market disruption. Finally, they do not observe other immediate features of participation that raise concerns about financial stability.
Aug 2019 Phantom of The Opera: ETFs and Shareholder Voting
Richard B. Evans ( University of Virginia, Darden School of Business), Oğuzhan Karakaş (Cambridge Judge Business School, University of Cambridge), Rabih Moussawi (Villanova University, School of Business), Michael J. Young (University of Virginia, Darden School of Business)
The short-selling of exchange-traded funds (ETFs) creates "phantom "ETF shares with cash flows rights but no associated voting rights. Both regular and phantom ETF shares trade at ETF market prices. However, while regular shares are backed by the underlying securities of the ETF and voted as directed by the sponsor, phantom shares are backed by collateral that is not voted. Introducing a novel measure of phantom shares both of the ETF and corresponding underlying securities, the authors find that increases in phantom shares are associated with (i) decreases in number of proxy votes cast (for and against), (ii) increases in broker non-votes, and (iii) increases in the vote premium over the voting record date for important votes for the underlying stocks of the ETF. Consistent with poor governance, firms with the highest proportion of phantom shares underperform.
Jul 23, 2019 Credit ETF Trading in Stressed Markets
Executive Summary Newsletter by Jane Street Group, LLC
Jane Street reports on credit ETF trading in stressed markets and finds that credit ETFs do not pose a systemic risk.
Jul 2019 Liquid Alternative ETFs: The Next Frontier in Institutional Investing
Greenwich Associates with special advisory lead by Andrew McCollum (Issue 2H 2019 Greenwich Report)
This report examines how ETFs and alternative asset classes are being used in institutional portfolios and analyze the emerging role being played by liquid alternatives in general and liquid alt ETFs in particular. Based on these trends and the expectations of the 107 institutional investors participating in their recent study, they present their projections for rapid growth of liquid alternative ETFs in institutional investment portfolios. One of the key conclusions drawn from this research is that liquid alt ETFs are still in their very early stages in the institutional marketplace. Drawing on data on institutional demand for alternatives classes and adoption rates of ETFs in other asset classes, the report projects a trajectory of further long-term growth for liquid alt ETFs in institutional portfolios
Feb 2019 Exchange Traded Funds: Clarity Amid the Clutter
Vanguard Research (Featured in Vanguard Commentary Newsletter)
In this research commentary, Vanguard highlights the similar regulatory regime for ETFs and mutual funds. They then discuss how investors use ETFs in the same ways as mutual funds when constructing portfolios. Finally, they describe some of the benefits ETFs provide that result from their exchange-traded nature.
Aug 2018 ETF Short Interest and Failures-To-Deliver: Naked Short-Selling or Operational Shorting?
Richard B. Evans ( University of Virginia, Darden School of Business), Rabih Moussawi (Villanova University, School of Business), Michael S. Pagano (Villanova University, School of Business), John Sedunov (Villanova University, School of Business)
The purpose of this paper is to examine the exemption granted to APs that allows them to sell new shares of the ETF, without purchasing the underlying basket of securities. ETFs constitute 10% of U.S. equity market capitalization but over 20% of short interest and 78% of failures-to-deliver. While this disproportionate share of short activity has raised concerns about excessive shorting/naked short-selling of ETFs, the authors identify an alternative source of ETF shorting related to creation/redemption activities. This source, “operational shorting”, is associated with not only improved liquidity and greater price efficiency, but also increased counterparty risk and trading linkages between liquidity providers. In exploring possible mechanisms for this risk relationship, the authors document a commonality in operational shorting across ETFs that share the same authorized participant and the financial leverage of the authorized participant appears to amplify this commonality
Sep 09, 2019 Are Index Funds Evil? A growing chorus of experts argue that they're strangling the economy-and must be stopped.
Frank Partnoy (The Atlantic)
Over the past year or two, a growing chorus of experts has begun to argue that index funds and shareholder diversification are strangling the economy, and need to be stopped. Author, Frank Partnoy examines the many factors that contribute to both sides of the argument.
Jun 2017 Market Accessibility, Corporate Bond ETFs, and Liquidity
Jayoung Nam (Kelley School of Business, Indiana University, Bloomington)
In this research paper, the author provides evidence that market accessibility ex ante plays an important role in how the underlying assets’ liquidity changes when a basket security is introduced. First, using a multi-market version of the Kyle model, he shows that if the underlying market is less accessible, then trading basket securities improves liquidity in the underlying market. In contrast, if the underlying market is more accessible, liquidity deteriorates. Second, he tests the theoretical predictions using data on corporate bonds before and after the introduction of corporate bond ETFs. The author finds that in contrast to the stock market, the inception of corporate bond ETFs improves the liquidity of the underlying bonds. This liquidity improvement is larger for low volume, high yield, and long-term bonds and for 144A bonds to which access was previously difficult for retail investors.
Mar 2017 Index Investing and Common Ownership Theories
Barbara Novick, Michelle Edkins, Gerald Garvey, Ananth Madhavan, Sarah Matthews, Jasmin Sethl (Featured in BlackRock's publication ViewPoint)
In this edition ofViewPoint, the contributors outline the potential benefits of index investing and the resulting growth of this style of management. They describe the limitations of some of the research literature, including misconceptions regarding index investing and shareholder engagement, and the absence of a plausible causal theory for some of the statistical relationships that have been suggested. First, they begin by exploring the adoption of index investing, first by institutional investors and subsequently by advisers and individuals, and the regulatory initiatives that are fueling adoption of index products by individuals. Second, they examine the theories underlying some of the economics research and explain why they fail to reflect the realities of the asset management business. Finally, they conclude by describing why the policy recommendations proposed by some of these scholars would take away many of the benefits that index investing is meant to provide investors and would greatly harm the average investor.
Jun 2016 Price Dynamics and Liquidity of Exchange-Traded Funds
Ananth Madhavan and Aleksander Sobczyk
Journal of Investment Management, Second Quarter/ Vol. 14, No., 2, (2016) pp 88-102

Exchange-traded funds (ETFs) have grown substantially in diversity, market significance,and size in recent years. As a consequence, there is increased interest by practitioners in the pricing and trading of these investment vehicles. This paper develops a model to examine ETF price discovery and premium dynamics, and estimates the model individually for 947 US-domiciled ETFs in the period 2005-2014. The authors find that pricing efficiency varies significantly across funds and is systematically related to cross-sectional measures of liquidity. They provide an illustration of a bond ETF during the financial crisis of 2008 to highlight how apparently dramatic discounts really reflected price discovery when the underlying basket was illiquid in the extreme.
Nov 21, 2016 Is Indexing Worse Than Marxism
Burton G. Malkiel (Wealthfront - BLOG)
Index funds have always been ridiculed by active mutual-fund managers. Two recent events have fueled a new set of criticisms. The mid-year 2016 Standard and Poor's report on index fund performance showed that the superiority of low-cost indexing, whether in the form of mutual funds or exchange-traded funds (ETFs), has increased over time. Over the preceding five and ten-year periods, index funds outperformed over 80 percent of their active peers. It has become increasingly untenable to claim that passive index investing produces mediocre results. The second related event is that investors have increasingly taken note. Money has been pouring out of active mutual funds and into passively-managed index funds.
Oct 04, 2016 Indexation: Capitalist Tool (Delivery agent of The Great Bubble)
Steven Bregman, President of Horizon Kinetics (Presentation prepared exclusively for Grants Interest Rate Observer Conference)
Steven Bregman, the co-founder and president of Horizon Kinetics, an independent research firm specializing in inefficient markets, presents on the exchange-traded funds (ETF) industry at the one and only Grants Conference, otherwise referred to as "the better-than-Oscar caliber spring investment conference".
Oct 2016 Innovation and Evolution in the Fixed Income Market
Vanguard Research (Featured in Vanguard Commentary Newsletter)
At first blush, it may appear as though the fixed income market is less liquid than it has been in the past. Corporate bond markets have grown considerably over the last several years, just as dealers’ appetite to hold bonds in inventory to facilitate trades has diminished. This shift in dynamics, though undeniable, is not a harbinger of doom, nor is it the end of the story. Rather, it's the beginning of a new chapter that highlights the resiliency of the financial markets and the imagination of many of its participants. The market and its participants are doing what they always do—adapting, innovating, and evolving. The markets have absorbed the changes spurred by the latest "new normal" by taking advantage of technological advancements and devising new methods of matching buyers and sellers. Maybe most important, the transformation of the fixed income landscape has not had the deleterious impact that some had predicted (or are still predicting). Vanguard researchers believe that these changes born of regulatory reform and monetary policy—including electronic trading and increased competition—will stick. Finally, they conclude that there is even more they can do to capitalize on the developments that have already taken hold.
Sep 06, 2016 The Impact of Innovation: Evidence from Corporate Bond ETFs
Caitlin Dillon Dannhauser (Villanova Univeristy, School of Business)
In this research paper, the author finds that using distinct features of corporate bond ETFs, financial innovation is found to have a significant and long-term positive valuation impact on the systemically important underlying. A one standard deviation increase in ETF ownership reduces high yield and investment grade bond spreads by 20.3 and 9.2 basis points, respectively, implying an average monthly price increase of 1.03% and 0.75%. Two novel quasi-natural experiments exploit exogenous changes in ETF eligibility to confirm the effect. Examining theoretical explanations for the effect, the author concludes that ETFs are found to decrease liquidity trader participation, increase institutional ownership, and insignificantly or negatively impact the liquidity of individual bonds.
Mar 07, 2016 How The U.S. Government Inadvertently Launched a $3 Trillion Industry.
Eric Balchunas (Bloomberg Markets)
The 840-page report from the U.S. Securities and Exchange Commission contained an unexpected present. It arrived on Nathan Most’s desk at the American Stock Exchange in February 1988. Four months earlier, on Oct. 19, Wall Street had collectively gasped as the Dow Jones industrial average plummeted 508 points, or 22 percent. Black Monday, as the rout became known, remains the biggest one-day crash in history, and this 5-pound white paper, titled The October 1987 Market Break, was the SEC’s postmortem on the event
Mar 2016 ETF Transaction Costs Are Often Higher Than Investors Realize
James J. Angel (Associate Professor in the McDonough School of Business at Georgetown University), Todd J. Broms (CEO of Broms Asset Management), Gary L. Gastineau (President of ETFConsultants.com) (Featured in The Journal of Portfolio Management Volume 42 Number 3)
This paper examines how and why ETF prices can deviate from their Net Asset Values, along with some of the implications for investors. The authors feel strongly that Investors need to be aware of these potential deviations when they place their orders.
Oct 2015 US Equity Market Structure: Lessons from August 24, 2015
Barbara Novick, Richard Prager, Hubert De Jesus, Superna Vedbrat, Martin Small, Samara Cohen, Ananth Madhavan, Alexis Rosenblum (Featured in BlackRock's publication ViewPoint)
In this edition of ViewPoint, the authors discuss the lessons from August 24, 2015 and analyze the brief breakdown in the arbitrage mechanism for many US-listed ETPs that invest in US equities. They believe that the industry and regulatory response should first focus on facilitating the free flow of pricing and order information across the US equity market ecosystem. Additionally, they share recommendations to refine trading mechanisms and “guardrails” to enhance the resiliency of the US equity market, which they believe will promote fair and orderly markets and benefit the functioning of both ETPs and individual stocks. As discussed throughout this ViewPoint, proposed improvements must balance attempts to improve market resiliency with the preservation of the existing and well-functioning processes through which equity securities are traded today.
Apr 2014 Do ETFs Increase Volatility?
Itzhak Ben-David, Francesco Franzoni, Rabih Moussawi ( National Bureau of Economic Research, Working Paper Series)
The authors analyze whether exchange traded funds (ETFs)--an asset of increasing importance--impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, they present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. They estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. They conclude that the evidence that ETF ownership increases stock turnover actually suggests that ETF arbitrage adds a new layer of trading to the underlying securities.
Jun 2013 Exchange Traded Products: Overview, Benefits and Myths
Ben Golub, Barbara Novick, Ananth Madhavan, Ira Shapiro, Kate Walters, Maurizio Ferconi (Featured in BlackRock's publication
While the most comprehensive, this edition of ViewPoint provides an overview of the range of investment vehicles commonly referred to as ETPs, its primary focus is ETFs. In this Executive Summary, the contributors identify specific benefits of ETFs, analyze their purported shortcomings and dig into some of the common myths about ETFs, particularly index-based products. They also identify some general principles that we believe can help maximize the utility of ETFs and minimize the potential for adverse impacts on investors and the broad financial markets.
Jul 2012 ETFs: For the Better or Bettor?
John Ameriks, Joel M. Dickson, Stephen Weber, David T. Kwon (Featured in Vanguard Commentary Newsletter, Issued by Vanguard Research)
This paper investigates the claim that ETFs “tempt” people to trade. This issue is of interest because, what if there is truth in that ETFs encourage individuals to trade, then these individuals may incur greater transaction costs (such as bid-ask spreads and commissions) than they would otherwise incur as long-term, buy-and-hold investors. Higher transaction costs could result, in aggregate, in lower investment returns. Moreover, prior research has shown that investors who trade frequently may be unsuccessful at correctly timing the market, thus leading to poor investment outcomes (Barber and Odean, 2000). The research attempts to disentangle the trading behavior differences among individual investors to determine whether ETF and traditional mutual fund shares are traded differently by the same group of individuals
Dec 22, 2010 The Effect of ETFS on Stock Liquidity
Sophia Jihae Wee Hamm (University of Pennsylvania) A Dissertation in Accounting
This paper investigates the effect of the introduction of exchange-traded funds (ETFs) on the liquidity of individual stocks. Prior analytical studies suggest that uninformed investors strictly prefer trading ETFs to trading individual stocks in order to avoid trading against informed investors. As a result of uninformed investors’ migration, the markets for individual stocks are predicted to become illiquid as ETFs become widely available. Using ETF trading and holdings data between 2002 and 2008, the author tests the hypothesis that the higher the percentage of a firm’s shares held by ETFs, the higher the adverse selection cost to trade the firm’s stock. She found that the availability of ETFs as an alternative trading option is positively associated with the adverse selection component of bid-ask spreads of stocks in ETFs. The positive association is shown to be stronger with ETFs holding more diversified portfolios of stocks, as uninformed investors’ incentives to switch are stronger for more diversified ETFs. The increase in the adverse selection costs of individual stocks is transferred to the ETF-level adverse selection costs, and diversified ETFs are especially shown to suffer from illiquidity of their underlying stocks. This dynamics between stock-level and ETF-level adverse selection casts a doubt whether uninformed investors can avoid the adverse selection cost by trading ETFs as effectively as expected.
ETFs Policy and Regulation
May 11, 2020 PRESS RELEASE: New York Fed Announces Start of Certain Secondary Market Corporate Credit Facility Purchases on May 12
Federal Reserve Bank of New York
The Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin purchases of exchange-traded funds (ETFs) on May 12. As specified in the term sheet, the SMCCF may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds
May 01, 2020 New York Fed Announces Start of Certain Secondary Market Corporate Credit Facility Purchases on May 12
Robert McCauley
Former BIS senior economist, Bob McCauley argues that the Fed, in following through on its announced intention to buy junk bonds, should not buy ETFs representing the whole market. Instead, it should buy a more selective, non-indexed mutual fund or individual bonds based on clear, defensible criteria.
Oct 01, 2019 The Law Offices of Ropes & Gray Publish a Client Alert Asset Management Newsletter on the Final ETF Rule
Ropes & Gray (Client Alert/ Asset Management Newsletter "Final ETF Rule)
In this newsletter, Ropes & Grey summarize the Final Ruling on Exchange Traded Funds. They explain that the Final Rule was adopted largely in the form of the Proposed Ruling, on June 28, 2018, but with several important changes in response to industry comments.
Sep 26, 2019 SEC Final Ruling on Exchange Traded Funds
The Securities and Exchange Commission
The Securities and Exchange Commission (the “Commission”) is adopting a new rule under the Investment Company Act of 1940 (the “Investment Company Act” or the “Act”) that will permit exchange-traded funds (“ETFs”) that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order. In connection with the final rule, the Commission will rescind certain exemptive relief that has been granted to ETFs and their sponsors.
Feb 22, 2019 SIFMA/AMG Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Timothy W. Cameron, Lyndsey Weber Keljo (AMG. SIFMA)
In this letter, SIFMA's Asset Management Group Head, Timothy W. Cameron, and Managing Director and Associate General Counsel, Lyndsey Weber Keljo, share comments on Proposed Rule 6c-11. The letter first offers support for the proposed ruling then mentions that AMG has several specific additional comments and suggestions that were based in part on discussions during a staff meeting. Many of the other comment letters received by the SEC on this Proposed Rule cited repeatedly in support of this letter by SIMFA / AMG.
Feb 04, 2019 State Street's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds
James E. Ross (State Street Global Advisors)
In this letter, State Street's Executive Vice President and Chairman, James E. Ross, shares comments on Proposed Rule 6c-11. The letter discusses that while there may eventually be a role for SEC rulemaking in this area, it is important to first reach consensus on how best to convey this information in a comparable, understandable format that supports investors’ ability to effectively use ETPs to accomplish their investment objectives. Throughout the letter, Ross urges the SEC to encourage a dialogue with ETF market participants on the most effective means to improve uniform disclosures for ETPs. He concludes with an offer to assist the SEC by writing, "State Street Global Advisors are already deeply involved in industry discussions on this topic, and would be pleased to participate in any SEC initiated industry forums on ETP disclosures."
Sep 26, 2019 Press Release: SEC Adopts New Rule to Modernize Regulation of Exchange-Traded Funds
SEC Press Release
The Securities and Exchange Commission announce in this press release their vote to adopt a new rule and form amendments that are designed to modernize the regulation of exchange-traded funds (ETFs), by establishing a clear and consistent framework for the vast majority of ETFs operating today.
Nov 15, 2018 CFA Institute's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds
Kurt N. Schacht, Linda L. Rittenhouse (CFA Institute)
In this letter, CFA Institute Advocacy's Managing Director, Kurt N. Schacht, and Director of Capital Markets, Linda L. Rittenhouse, share their comments on Proposed Rule 6c-11. The letter encourages the SEC to engage in future steps to address issues involved in leveraged ETFs. Highlights include concerns about (i) how many investors currently do not fully understand the risks posed by these instruments and (ii) the concerns regarding the potential destabilizing effects that may occur with derivative instruments like ETFs. The letter concludes with a request to the SEC to consider the issues that may arise when the portfolios of ETFs trade on international markets may not sync with the timing of the US market on which the ETF is listed.
Oct 29, 2018 Fixed Income Market Structure Advisory Committee's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Securities and Exchange Commission Fixed Income Market Structure Advisory Committee
In this letter, Fixed Income Market Structure Advisory Committee representatives, share comments on Proposed Rule 6c-11. The letter states that the proposed rule offers a timely opportunity for the Commission to consider more consistent terminology for ETPs as the Commission works to foster more consistent regulatory standards for traditional ETFs. In addition, the letter mentions specific concerns regarding the potential problems that could arise from the ruling.
Oct 19, 2018 Bluefin Trading's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Jeffrey A. Jacobus (Bluefin Trading, LLC)
In this letter, Bluefin Trading's Chief Compliance Officer, Jeffrey A. Jacobus, shares comments on Proposed Rule 6c-11. The letter states that "very significant points" need to be factored in when considering new rules dealing with ETF exemptive relief. Jacobus comments how failure to address these issues could be detrimental to our markets and may ultimately lead to larger problems during times of outflows or higher volatility in the fixed income markets.
Oct 18, 2018 New York Stock Exchange's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Douglas Yones ( NYSE)
In this letter, the New York Stock Exchange's Head of Exchange Traded Products, Douglas Yones, shares comments on Proposed Rule 6c-11. The letter outlines specific supporting remarks and also includes concerns brought forth by the NYSE. Throughout the letter, Yones provides strong supportive reasoning on all highlighted points.
Oct 04, 2018 Eaton Vance Corporation's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Thomas E. Faust Jr. (Eaton Vance Corp.)
In this letter, Eaton Vance Corporation's Chairman and Chief Executive Officer, Thomas E. Faust Jr., shares comments on Proposed Rule 6c-11. The letter addresses various issues relating to ETFs and similar vehicles and instruments. Faust provides supporting documentation on all highlighted points and concludes with recommendations on certain aspects of the proposal.
Oct 03, 2018 Virtu Financial Inc.'s Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds
John Dibacco (Virtu Financial Inc.)
In this letter, Virtu Financials' Head of ETFs, John Dibacco, shares comments on Proposed Rule 6c-11. The letter mentions key issues regarding ETF's as redeemable securities, the disclosure provisions, portfolio holdings transparency, basket flexibility, affiliates, and recommendations with regard to payments to market makers.
Oct 01, 2018 John Hancock Investments' Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Andrew G. Arnott (John Hancock Investments)
In this letter, John Hancock Investments' President and CEO, Andrew G. Arnott shares comments on the Proposed Rule 6c-11. The letter details recommendations, concerns and suggestions for the SEC to consider very seriously. Specifically, the letter objects to the proposed introduction of “bid-ask spread” data in an ETF’s summary prospectus as well as in the online interactive calculator. Arnott is also concerned about "unintended consequences" which would ultimately cause an investor to make an investment decision based on misleading or stale data.
Oct 01, 2018 Charles Schwab Investment Management's Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Marie Chandoha (Charles Schwab Investment Management)
In this letter, Charles Schwab Investment Management's Chief Executive Officer, Marie Chandoha, shares comments on the Proposed Rule 6c-11. The letter indicates strong support for the overall goals of the Proposed Rule. The letter highlights include remarks about how the rule will level the playing field for existing and new ETFs, lead to increased innovation, create opportunities for new investment advisers to enter the industry and increase investor choice. The letter goes onto acknowledge how the rule will also level the playing field for individual investors, who today may bear higher costs (e.g., in the form of wider bid-ask spreads) simply because they choose to invest in an ETF that is subject to different requirements and conditions under its exemptive relief than ETFs that provide similar investment exposure. Additionally, the letter supports the goals of the proposed amendments to the current disclosure rules which they believe would increase transparency and access to additional information for investors. In closing, the letter suggests a number of recommendations for enhancements to the SEC for consideration.
Oct 01, 2018 Direxion's Letter to SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Angela Brickl (Direxion ETF Funds)
In this letter, Direxion's General Counsel's, Angela Brickl, shares comments on the Proposed Rule 6c-11. The letter expresses strong support that the proposed approach would provide for more efficiency and certainty in the marketplace. Additionally, the letter highlights that the ruling would allow one of the most successful financial product innovations to further flourish.
Oct 01, 2018 Legg Mason Global Asset Management's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds
Robert I. Frenkel (Legg Mason, Inc.)
In this letter, Legg Mason Global Asset Management's Vice President and Deputy General Counsel, Robert I. Frenkel shares comments on Proposed Rile 6c-11. The letter urges the SEC to further consider their recommendations. They include: (i) Eliminating the requirement to distribute intraday indicative values ("IIVs") for ETFs subject to the rule, (ii) Permitting acceptance of creation/redemption orders prior to the publishing of the next day's basket, and (iii) Refining the custom basket definition to eliminate "cash-in-lieu" transactions that are part of a regular basket for ETF creation/redemption.
Oct 01, 2018 J.P Morgan Asset Management's Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Joanna M. Gallego (J.P Morgan Asset Management)
In this letter, JP Morgan's Asset Management's Managing Director, Joanna M. Gallegos, shares comments on Proposed Rule 6c-11. The letter outlines certain recommendations for the SEC to consider. In conclusion, the letter mentions their full support to discussion points raised in the letters submitted by both The Investment Company Institute (ICI) and SIMFA's Asset Management Group (SIMFA / AMG).
Oct 01, 2018 Jane street Capital's Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Frank Liu (Jane Street Capital )
In this letter, Jane Street Capital's Chief Compliance Officer, Frank Liu, comments on Proposed Rule 6c-11. The letter provides commentary on several areas that need to be further considered; (i) ETFs should be required to promptly and fairly disseminate certain information materially impactful on the arbitrage mechanism, (ii) ETFs should not be required to post portfolio holding and basket information prior to accepting creation and redemption orders, (iii) An ETF should be required to have multiple authorized participants. In addition, the letter specifically remarks on areas supported by Jane Street Capital.
Oct 01, 2018 ICE IDS's' Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Lynn Martin (Intercontinental Exchange Data Services, ICE)
In this letter, Intercontinental Exchange Data Services' President and Chief Operating Officer, Lynn Martin, shares comments on Proposed Rule 6c-11. The letter shows support to the proposed ruling. Furthermore, the letter indicates that the Commission’s proposed approach would provide for more efficiency and certainty in the marketplace and that the ruling would allow one of the most successful financial product innovations to further flourish.
Oct 01, 2018 ProShare Advisors' Letter to the SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Richard F. Morris (ProShare Advisors LLC)
In this letter, ProShare Advisors' General Counsel, Richard F. Morris, shares comments on Proposed Rule 6c-11. The letter requests further consideration about one aspect in particular urging the Commission to reconsider. The letter states that the relief provided by Rule 6c-11 would not be available to ETFs that “seek, directly or indirectly, to provide returns that exceed the performance of a market index by a specified multiple, or to provide returns that have an inverse relationship to the performance of a market index, over a fixed period of time." Morris includes in the letter, the belief that this exclusion from the ability to rely on the Proposed Rule is unwarranted and inconsistent with the public policy rationale that informs the Proposed Rule as a whole.
Oct 01, 2018 Oppenheimer Funds' Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Sharon French, Cynthia Lo Bessette (Oppenheimer Funds)
In this letter, Oppenheimer Funds' Executive Vice Presidents, Sharon French and Cynthia Lo Bessette, comment on Proposed Rule 6c-11. The letter outlines precisely what areas they support. In addition, it details recommendations and suggestions for the SEC to consider. The letter concludes with mention that many of their discussion points are echoed in the letters submitted by both The Investment Company Institute (ICI) and SIMFA's Asset Management Group (SIMFA / AMG).
Oct 01, 2018 Franklin Templeton Investments' Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
David Mann, Gaston Gardey (Franklin Templeton Investments)
In this letter, Franklin Templeton Investment's Head of Global ETF Capital Markets, David Mann, and Vice President of Fund Administration, Gaston Gardey, share comments on Proposed Rule 6c-11. The letter supports the overall objective for the rule. However, Mann and Gardey offer two key modifications to assist the SEC in finalizing the proposal.
Oct 01, 2018 Cboe Global Investments' Letter to SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Laura Morrison, Kyle Murray (Cboe Global Investments)
In this letter, Cboe Global Investments' SVP & Global Head of Exchange Traded Products, Laura Morrison, and Assistant General Counsel, Kyle Murray, share comments on Proposed Rule 6c-11. The letter applauds the Commission for proposing the ETF Rule. Specifically, the letter indicates how the timing of this Proposed Rule is opportune. In addition, the letter encourages the Commission to work with exchanges in order to achieve similar goals related to listing ETFs on a national securities exchange. The letter also responds to specific topics.
Oct 01, 2018 Morningstar Inc.'s Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Aron Szapiro, Jasmin Sethi (Morningstar, Inc.)
In this letter, Morningstar's Director of Policy Research, Aron Szapiro, and Associate Director of Research, Jasmin Sethi, share comments on Proposed Rule 6c-11. The letter clearly outlines their broad view on the proposed rule and its possible effects for investors. The letter mentions their supporting remarks and their specific suggestions for the SEC to consider.
Sep 28, 2018 The Vanguard Group's Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Gregory Davis (The Vanguard Group)
In this letter, Vanguard Group's Chief Investment Officer, Gregory Davis, shares comments on Proposed Rule 6c-11. The letter supports the Commission's approach to modernizing the ETF regulatory framework, including the Proposed Rule's facilitation of basket flexibility, elimination of intraday indicative value ("ITV"), and elimination of creation unit size minimums. In addition, the letter also emphasizes support to better educate retail investors on the costs associated with trading ETFs and recommend modifications to simplify and streamline such disclosures for retail investors. The letter also recommends that the Commission considers certain alternatives to full daily portfolio holdings disclosure that more appropriately balance the relevant costs and benefits associated with such disclosure.
Sep 28, 2018 NASDAQ's Letter to the SEC— In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Thomas A. Wittman
In this letter NASDAQ's Executive Vice President, Thomas A. Wittman shares comments on the Proposed Rule 6c-11. The letter indicates several aspects of the Proposal that they believe can be either modified or enhanced for the benefit and protection of investors, issuers and other market participants. The comments within their letter are categorized as those that; (i) promote the economics of market making, (ii) augment investor protections, (iii) improve the rule filing process, and (iv) enhance the regulation of ETFs.
Sep 26, 2018 BlackRock's Letter to SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)
Samara Cohen, Deepa Damre, Alexis Rosenblum (BlackRock)
In this letter, BlackRock's ETFs Executive Team share comments on the Proposed Rule 6c-11. The letter highlights several technical comments and suggestions relating to certain aspects of the Commission’s proposals. Their comments first seek to address aspects related to the construction and publication of baskets. They explain how custom baskets are employed based on their experience, and offer detailed comments on certain modifications and clarifications necessary to avoid unintended consequences that may detract from the intended benefits of custom baskets. In addition, they offer a number of comments on particular aspects, including portfolio transparency, ETF disclosure and related amendments, the time period for delivery of redemption proceeds, trading relief under the Securities Exchange Act of 1934 (the “Exchange Act”), and certain other questions and issues are raised They conclude by addressing the scope of the Proposed Rule and by expressing their continued support for an exchange-traded product (“ETP”) classification scheme.
Sep 21, 2018 Investment Company Institute's Letter to SEC — In Response to Proposed Rule (6/28/2018) on Exchange Traded Funds (Addressed to Mr. Brent J. Fields, Secretary, U.S. Securities and Exchange Commission Re: Exchange-Traded Funds)D59C59:J59K59E59:J59
Susan Olsen (Investment Company Institute, ICI))
In this letter, Investment Company Institute's General Counsel, Susan Olsen, shares comments on the Proposed Rule 6c-11. The letter highlights several technical comments and suggestions relating to certain aspects of the Commission’s proposals. This letter is very organized and thorough with its comments, recommendations and suggestions on the Proposed Rule. Many of the other industry letters, received by the SEC, on this Proposed Rule cited repeatedly in support of Olsen’s letter.
Jun 29, 2018 The Law Offices of Chapman and Cutler LLP, publish a Client Newsletter on Proposed Rule 6c-11
Chapman and Cutler LLP Law Firm
In this Client Newsletter, the Law Offices of Chapman and Cutler, discuss the Proposed Rule by the SEC, the systemic effects of the rule and explores what’s next for their clients.
Jun 28, 2018 SEC Proposed Ruling on Exchange Traded Funds. Proposed Rule 6c-11.
Mr. Brent J. Fields (Secretary, U.S. Securities and Exchange Commission)
The Securities and Exchange Commission is proposing a new rule under the Investment Company Act of 1940 (the “Investment Company Act” or the “Act”) that would permit exchange-traded funds (“ETFs”) that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order. In connection with the proposed exemptive rule, the Commission proposes to rescind certain exemptive orders that have been granted to ETFs and their sponsors. The proposed rule and form amendments are designed to create a consistent, transparent, and efficient regulatory framework for ETFs and to facilitate greater competition and innovation among ETFs. This proposed ruling advises the public to offer comments by Oct. 1, 2018 - for consideration prior to the final ruling.
Jun 28, 2018 Press Release: SEC Proposes New Approval Process for Certain Exchange Traded Funds
SEC Press Release
The Securities and Exchange Commission voted to propose a new rule and form amendments intended to modernize the regulatory framework for exchange-traded funds (ETFs), by establishing a clear and consistent framework for the vast majority of ETFs operating today. ETFs that satisfy certain conditions would be able to operate within the scope of the Investment Company Act of 1940 and to come to market without applying for individual exemptive orders. The proposal would therefore facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors.
Jul 2008 The SEC's Proposed ETF Rules: Implications for Compliance and the Industry
Mark D. Perlow, Stacy L.Fuller
In April 2008, the SEC proposed two new rules that, if adopted, will reduce compliance burdens for both ETFs and funds that invest in ETFs. This article discusses some of the basic compliance requirements for ETFs and funds that invest in ETFs, including how these requirements would be clarified and simplified under the proposed ETF rules. The article concludes by discussing broader implications of the proposed rules for the evolution of the fund industry.