Comments on: ETF 2-for-1 Splits – Gimme’ a Break! http://investwithanedge.com/etf-2-for1-splits-%e2%80%93-gimme%e2%80%99-a-break Actionable Ideas for Your ETFs, Funds, & Stocks Fri, 12 Mar 2010 15:09:01 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Paul Weisbruch http://investwithanedge.com/etf-2-for1-splits-%e2%80%93-gimme%e2%80%99-a-break/comment-page-1#comment-2730 Paul Weisbruch Thu, 02 Jul 2009 23:07:59 +0000 http://investwithanedge.com/?p=2157#comment-2730 It has been about 9 months since this article was published, and it is time to readdress this. The AUM in the RevenueShares ETFs has more than tripled to approximately $133 million now, since the publication of this article, and the number of market makers in the ETFs and Authorized Participants has grown at least fivefold. A point that was not mentioned in this article is that ETF companies have an incentive to get market makers and institutional trading desks to work with them, to insure tight spreads, and efficient markets in their ETFs that have accurate pricing in and around NAV. The notional value of an ETF is very important to a market maker when it comes to creation/redemption costs, as it is cheaper for a market maker to create or redeem a $17 ETF than a $35 ETF. Most ETFs can only be created or redeemed in 50,000 share blocks, so it's much more appealing for the market makers to create/redeem regularly (and cheaper) on lower priced ETFs. This encourages more institutional activity, tighter spreads, more active market makers pricing the underlying index baskets and trading the ETFs accordingly, etc etc. So the 2 for 1 split back in October in 2008 has been nothing but a success, for the ETF company, the investors, and the institutional trading desks that are involved in these products. As for the notion of ADVT, as an ETF company, the volume isn't so important to the issuer as is "what side" the volume is on. If 100% of your daily volume is new buyers in your ETFs, then that is good for the long term viability of the fund company. If you have a lot of volume and it is half buyers, half sellers, or worse, more sellers than buyers, that does not benefit the ETF company, and is largely just noise. Does a lot of volume lead to tight bid/ask spreads and efficient pricing? Yes it does. But average daily trading volume is only part of the overall story. Thank you. It has been about 9 months since this article was published, and it is time to readdress this. The AUM in the RevenueShares ETFs has more than tripled to approximately $133 million now, since the publication of this article, and the number of market makers in the ETFs and Authorized Participants has grown at least fivefold. A point that was not mentioned in this article is that ETF companies have an incentive to get market makers and institutional trading desks to work with them, to insure tight spreads, and efficient markets in their ETFs that have accurate pricing in and around NAV. The notional value of an ETF is very important to a market maker when it comes to creation/redemption costs, as it is cheaper for a market maker to create or redeem a $17 ETF than a $35 ETF. Most ETFs can only be created or redeemed in 50,000 share blocks, so it’s much more appealing for the market makers to create/redeem regularly (and cheaper) on lower priced ETFs. This encourages more institutional activity, tighter spreads, more active market makers pricing the underlying index baskets and trading the ETFs accordingly, etc etc. So the 2 for 1 split back in October in 2008 has been nothing but a success, for the ETF company, the investors, and the institutional trading desks that are involved in these products.

As for the notion of ADVT, as an ETF company, the volume isn’t so important to the issuer as is “what side” the volume is on. If 100% of your daily volume is new buyers in your ETFs, then that is good for the long term viability of the fund company. If you have a lot of volume and it is half buyers, half sellers, or worse, more sellers than buyers, that does not benefit the ETF company, and is largely just noise. Does a lot of volume lead to tight bid/ask spreads and efficient pricing? Yes it does. But average daily trading volume is only part of the overall story. Thank you.

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