Glance into ETF index holdings of Harvard, MIT and Yale Endowments.
Oct/30/08 12:34 PM Filed in: 7 Education
and Research
The
endowments of Harvard, MIT, and Yale all utilize
Index ETFs as a part of their investment strategies.
Reviewing their top ETF holdings provides insight
into their investment strategy.
It seems that heading into this crisis, they had significant allocations to Emerging Market Equity Indexes. It will be interesting to review their public filings at year end. I would not be surprised to see them adding to their US Equity positions as the US markets declined in September and October.
It seems that heading into this crisis, they had significant allocations to Emerging Market Equity Indexes. It will be interesting to review their public filings at year end. I would not be surprised to see them adding to their US Equity positions as the US markets declined in September and October.
Harvard Endowment
MIT Endowment
Yale Endowment
ETF Market Makers Struggled Last Week
Sep/23/08 08:41 AM Filed in: 7 Education
and Research
In this article I address poor market making in two
PowerShare ETFs and how
you can protect and correct poor execution.
Last week PowerShares S&P 500 BuyWrite Portfolio (PBP) experienced extremely poor execution on two trades. On Friday September 19th, 4,000 shares traded at $400 then executed down closer to its NAV price of 24. PBP then traded 929 shares at $300. It then resumed trading closer to its NAV of 24.
My attention was originally drawn to the poor market making because of our position in PowerShares Emerging Markets Sovereign Debt Portfolio (PCY). It also experienced erratic trading. Calls to PowerShares last week about PCY yielded nothing. Their reps had no idea why it was trading erratically and never called us back with an answer.
Therefore, in my search for answers I decided to review the PowerShares Prospectus for this ETF. I found the following risk disclosures:
“Market Trading Risk - Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Underlying Index.”
“Additional Risks – Fluctuation of Net Asset Value - The NAV of a Fund’s Shares will generally fluctuate with changes in the market value of the Fund’s holdings. The market prices of the Shares will generally fluctuate in accordance with changes in NAV as well as the relative supply of and demand for the Shares on the AMEX, the NASDAQ or the NYSE Arca. The Adviser cannot predict whether the Shares will trade below, at or above NAV. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for the Shares will be closely related to, but not identical to, the same forces influencing the prices of the stocks of a Fund’s Underlying Index trading individually or in the aggregate at any point in time.
However, given that the Shares can be purchased and redeemed in Creation Units (unlike shares of closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their NAV), the Adviser believes that large discounts or premiums to the NAV of the Shares should not be sustained.” – A complete prospectus can be obtained on powershares.com.
After reviewing the prospectus I did not feel that it adequately disclosed the risks or possibility of extremely poor execution. Therefore this week I called PowerShares to inquire further about the erratic trading in (PBP) and (PCY) and they finally had an answer: They informed me that some of the market makers in their funds had executed trades poorly amidst the heavy trading volumes last week. They ended up busting the trades that were executed poorly to give fair and accurate pricing of PCY intra-day value to the market.
PowerShares also informed me that they would review on a case-by-case basis the execution of trades that are far away from their ETF’s intra-day values. The representative I spoke with suggested that before placing trades in their funds I should check to see if the ETF is trading near its intra-day.
Obviously limit orders are important and would have prevented some of the issues that occurred in the trading of these two ETFs. In addition you can be more certain of accurate pricing by reviewing the intra-day values of an ETF before you trade.
Example: in yahoo finance the ticker for PCY’s intra-day value is “^PCY-IV”.
Lastly, if you experience extremely poor execution, call PowerShares and notify them of the error. They may be able to assist you in correcting it.
Disclosure: The author’s firm has positions in the following PowerShares ETFs PSP, PFP and PCY.
you can protect and correct poor execution.
Last week PowerShares S&P 500 BuyWrite Portfolio (PBP) experienced extremely poor execution on two trades. On Friday September 19th, 4,000 shares traded at $400 then executed down closer to its NAV price of 24. PBP then traded 929 shares at $300. It then resumed trading closer to its NAV of 24.
My attention was originally drawn to the poor market making because of our position in PowerShares Emerging Markets Sovereign Debt Portfolio (PCY). It also experienced erratic trading. Calls to PowerShares last week about PCY yielded nothing. Their reps had no idea why it was trading erratically and never called us back with an answer.
Therefore, in my search for answers I decided to review the PowerShares Prospectus for this ETF. I found the following risk disclosures:
“Market Trading Risk - Risk is inherent in all investing. An investment in the Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in value of the Underlying Index.”
“Additional Risks – Fluctuation of Net Asset Value - The NAV of a Fund’s Shares will generally fluctuate with changes in the market value of the Fund’s holdings. The market prices of the Shares will generally fluctuate in accordance with changes in NAV as well as the relative supply of and demand for the Shares on the AMEX, the NASDAQ or the NYSE Arca. The Adviser cannot predict whether the Shares will trade below, at or above NAV. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for the Shares will be closely related to, but not identical to, the same forces influencing the prices of the stocks of a Fund’s Underlying Index trading individually or in the aggregate at any point in time.
However, given that the Shares can be purchased and redeemed in Creation Units (unlike shares of closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their NAV), the Adviser believes that large discounts or premiums to the NAV of the Shares should not be sustained.” – A complete prospectus can be obtained on powershares.com.
After reviewing the prospectus I did not feel that it adequately disclosed the risks or possibility of extremely poor execution. Therefore this week I called PowerShares to inquire further about the erratic trading in (PBP) and (PCY) and they finally had an answer: They informed me that some of the market makers in their funds had executed trades poorly amidst the heavy trading volumes last week. They ended up busting the trades that were executed poorly to give fair and accurate pricing of PCY intra-day value to the market.
PowerShares also informed me that they would review on a case-by-case basis the execution of trades that are far away from their ETF’s intra-day values. The representative I spoke with suggested that before placing trades in their funds I should check to see if the ETF is trading near its intra-day.
Obviously limit orders are important and would have prevented some of the issues that occurred in the trading of these two ETFs. In addition you can be more certain of accurate pricing by reviewing the intra-day values of an ETF before you trade.
Example: in yahoo finance the ticker for PCY’s intra-day value is “^PCY-IV”.
Lastly, if you experience extremely poor execution, call PowerShares and notify them of the error. They may be able to assist you in correcting it.
Disclosure: The author’s firm has positions in the following PowerShares ETFs PSP, PFP and PCY.
Stock pickers are dead
Aug/06/08 10:01 PM Filed in: 7 Education
and Research
More evidence of the shift towards indexing vs. active management (stock pickers) appeared today as the Massachussets State Pension Fund moved 2 billion out of Legg Mason active mangers to indexing strategies. Eventually they will be moving all domestic equity exposure to indexing strategies. This was reported on Bloomberg today (click to read article).
Even more incredible, there was a study released that shows only 0.6% of active managers exhibited truly positive alphas over the 1975 to 2006 period (click to read study). We believe strongly in the benefits of Indexing, especially for individual investors. The odds of successfully picking stocks and the odds of picking an active manager that will outperform their relative benchmark is incredibly low.
ETF's and why some advisors avoid them
Jun/19/08 08:32 AM Filed in: 7 Education
and Research | 2 Conflicts
of Interest
Exchange Traded Funds (ETFs) have been around since
1993. They are not a new phenomenon in the financial
world, yet they are often overlooked by many of our
peers (other advisors). Oddly enough one of the Yale
Endowment’s biggest positions is an ETF. ETFs may be
a solid investment because of their low costs, tax
efficiency, and stock-like features, so why hasn't
the Investment Advisory community caught on?
It is not the case that investment professionals are unaware of the benefits of investing in ETFs. Many agree that they are one of the most cutting-edge investment tools in quite some time, however the problem seems to be that there are just too many. Investment Advisors are apprehensive about untested indexes and can be overwhelmed by the number of ETFs available, new and old.
Many Investment Advisors market themselves and pride themselves on the idea that they are able to pick the stocks that will perform best. An index, like one used in an ETF, would devalue the research and intelligence that Advisors believe goes into this stock selection.
Also, and perhaps most importantly, it is difficult to charge high fees when selling products that use an index. Another argument is that more and more young people coming out of business school are staying away from the Investment Advisory business and gravitating towards hedge funds and private equity firms. This would mean that Investment Advisory firms tend to be older and older advisors are more likely not to know or care what ETFs are.
Any way you look at it investment advisors have tended to neglect ETFs even though they can be a very advantageous investment tool and have been an important investment tool for university endowments.
Important Disclosure
It is not the case that investment professionals are unaware of the benefits of investing in ETFs. Many agree that they are one of the most cutting-edge investment tools in quite some time, however the problem seems to be that there are just too many. Investment Advisors are apprehensive about untested indexes and can be overwhelmed by the number of ETFs available, new and old.
Many Investment Advisors market themselves and pride themselves on the idea that they are able to pick the stocks that will perform best. An index, like one used in an ETF, would devalue the research and intelligence that Advisors believe goes into this stock selection.
Also, and perhaps most importantly, it is difficult to charge high fees when selling products that use an index. Another argument is that more and more young people coming out of business school are staying away from the Investment Advisory business and gravitating towards hedge funds and private equity firms. This would mean that Investment Advisory firms tend to be older and older advisors are more likely not to know or care what ETFs are.
Any way you look at it investment advisors have tended to neglect ETFs even though they can be a very advantageous investment tool and have been an important investment tool for university endowments.
Important Disclosure
Homebuilders Index off 68%
Sep/14/07 04:02 PM Filed in: 7 Education
and Research
While retail investors are selling out of their
REIT's and watching the value of their homes decline,
the smart money on Wall Street is gearing up to buy
everything on sale. The S&P Homebuilders index
(ETF: XHB) peaked in July of 2005 and has fallen 68%
since then. The real estate bust has sent individual
investors running for the hills, while veteran
investors like Warren Buffet, Bill Miller and The
Carlyle Group have rolled up their sleeves and
started buying into the weakness.
They have proven to be a bit early, but listen to what Bill Miller had to say in his recent letter to investors: "The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade."
While Buffet and Miller have focused on the homebuilders, other institutions are not shying from buying hard assets. Carlyle just finished raising $3 billion for a private equity fund and it plans to put it to work in a relative value strategy. The leverage will be low, they will only borrow $4 billion, giving them a total of $7 billion to invest. One thing's for sure, a weak dollar is making U.S. assets like real estate look more attractive to foreign investors and over the next few years their appetite for these discounted assets may be the stabilizing factor for the sector.
In 2005 the homebuilders index signaled the eventual real estate slow down. It acted as a leading indicator falling before other housing related stocks and as a result it is likely to be the first real estate sector to turn around. While the average individual investor is thinking, "real estate is just getting worse!" and the average institutional investor is saying, "I can't buy them because I need to make next month's numbers," investors with a longer time horizon, like Warren Buffet and Bill Miller, are likely to be well rewarded. Most people are calling for the real estate slowdown to continue into 2009 and 2010. If that prediction is true, it's likely that housing related stocks, and XHB, will bottom well before that time.
They have proven to be a bit early, but listen to what Bill Miller had to say in his recent letter to investors: "The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade."
While Buffet and Miller have focused on the homebuilders, other institutions are not shying from buying hard assets. Carlyle just finished raising $3 billion for a private equity fund and it plans to put it to work in a relative value strategy. The leverage will be low, they will only borrow $4 billion, giving them a total of $7 billion to invest. One thing's for sure, a weak dollar is making U.S. assets like real estate look more attractive to foreign investors and over the next few years their appetite for these discounted assets may be the stabilizing factor for the sector.
In 2005 the homebuilders index signaled the eventual real estate slow down. It acted as a leading indicator falling before other housing related stocks and as a result it is likely to be the first real estate sector to turn around. While the average individual investor is thinking, "real estate is just getting worse!" and the average institutional investor is saying, "I can't buy them because I need to make next month's numbers," investors with a longer time horizon, like Warren Buffet and Bill Miller, are likely to be well rewarded. Most people are calling for the real estate slowdown to continue into 2009 and 2010. If that prediction is true, it's likely that housing related stocks, and XHB, will bottom well before that time.