what's going on everyone Charlie here we're gonna take another look at some BlackRock
uh iShares etf terminology and literature I'm gonna spend some more time reverse engineering
some of the iShares uh methodology for determining how well an etf is performing let's take a look
so there's five metrics for evaluating an etp or an etf etp just means exchange traded product
so there's five things there's usage trading costs premium discount behavior tracking
and primary market efficiency so using black rocks on website documentation we will reverse engineer
their product evaluation procedure and see if it makes sense and we're going to be referring to the
ijr etf that is in GameStop that sees tremendously high volume has a lot of weird metrics surrounding
it so etps have become indispensable tools for analyzing and investing in financial markets
but not all etps are created equal while there are many ways to evaluate etp performance this
paper explores the five key metrics that i just mentioned that can help investors assess the
market quality of an etp together these metrics can reveal an etp's ability to offer liquidity
price discovery and efficient access to markets and all market conditions so the first one we're
going to look at is usage now etps have matured from buy and hold asset allocation tools that let
you own the markets to tools that allow you to trade the markets market data shows that
investors increasingly use etps to both allocate capital as well as adjust portfolio positions
etps accounted for an average of 23 percent of US equity trading volume in the first half of 2020
um and then oh I'm sorry in 2017 etp's accounted for an average of 23 of us equity trading volume
and then by the first half of 2020 that rose to 29 and i can only imagine that has climbed higher
since then so it gives you an example here um saying that trading volumes and iShares - AAA
and a rated corporate bond spiked in the first half of 2020. now is market volatility
accelerated and investors thought to generate income and to limit downgrade risk the fund's
average daily volume or adv surged to over 15 million in quarter two of 2020 nearly six times
its adv in 2019 data shows that instead of simply relying on individual AAA, a rated corporate bonds
investors increasingly turn to the more liquid etf to access the highest rated investment grade
so that's not the case here because this is not a AAA rated etf so that can't be the case so
likely we're seeing a lot of usage in this uh etf due to the fact they're constantly forced into
a situation where they have to constantly create and redeem shares uh synthetically
to keep GameStop at bay let's go and take a look here trading costs so this is where market makers
come into play the lower the bid ask spread size is the less money market makers are making that's
where they make the majority of their money no bid ask spreads or the cost of trading into
and out of a fund can vary significantly from etp to etp spreads can be impacted by security
specific criteria including asset class as well as broader market conditions so it's
not advantageous for the market makers to engage in this situation but it is for the banks because
the spreads being so small actually helps lower the cost of the etp or ijr in this case
so it says here that uh spreads can be impacted by the broader market conditions and for example in
times of volatility like what we're seeing right now when market uncertainty rises which what we're
living through right now bid ask spreads typically widen well that's not the case here for ijr it's
1.0 or 104.37 and the ask is 104.38 that's a 0.01 difference so it's really unlikely
the market makers are making money it's likely that market makers may not be involved in this
because there's no money to be made and it's only the aps which can actually act as market makers
in certain funds because the bid has spread small so in times of uncertainty like what we're
seeing now with the broader market this should theoretically widen if it were to be operation
operating healthfully so we can go and rule that one out too
so number three premium and discount behavior so real quick let's define a word that I'm sure a lot
of you are wondering what it means arbitrage now arbitrage what it is it's the simultaneous buying
and selling of securities currency or commodities in different markets or in derivative forms
in order to take advantage of different uh differing prices for the same asset
so an etp's market price is typically in line with the value of its underlying securities but it's
possible for the etps to trade at prices above premium or below at a discount so considering
GameStop's price is much higher than the nav the net asset value of ijr being I think around 104 um
that's not healthy either now for example if the price of an etp share is greater than the value
of its underlying securities that's not the case for ijr the etp is said to be trading at a premium
in response market participants may engage in arbitrage by buying the underlying securities
and engaging them with an etp issuer via authorized participant or ap in return for
newly created etp shares which may be which may then be sold into the market for a profit
so this is what they're doing anyways despite it trading at a discount because they again
they have to if you look at the net assets for this etf they consistently and constantly go up
probably due to the arbitrage that is being created and implemented on a daily basis to
create increase the supply of the available etp shares because when you increase the supply of the
available etp shares that ultimately ultimately reduces the premium of the etp so they're cutting
costs by increasing shares while at the same time selling naked synthetic etfs or synthetic
shares into the market for artificial pressure and it also when you do that it keeps the nav
right along with the uh underlying etp so the goal is to get the nav and the etp
you know price trading uh near each other number four tracking so tracking measures the difference
between a fund's return and the benchmark indexes return tracking volatility measures the volatility
or the standard deviation of this tracking difference month over month now the volatility
on this is high again another reason why the bid s spread should be increasing but it's not
so if you look right here at the xtsla fund that's the number one holding in ijr and i guarantee you
the reason is is because it's lowering the cost of the nav as x tesla shares are valued at one dollar
each so by having this big fund in there with like 800 million assets that's weighing it down
um at a dollar a piece that is going to keep this nav constantly lower than the underlying shares
like GameStop and things like that which will constantly put them in a state of arbitrage or
creating more shares to keep the cost down so it almost seems like a hamster wheel that never ends
now lastly primary market efficiency even though most etp trading occurs the secondary
market where investors buy and sell existing etp shares on exchange efficient efficient
primary market operations or the creation and redemption of etp shares is at the heart of
etp market quality primary market efficiency requires a functioning arbitrage mechanism
as previously described which helps keep the price of an etp in line with the value of its nav
for example an etp that interacts with a diverse set of aps will have
a more competitive market which aps are motivated to capture volumes more market
participant involvement can provide additional support for etp's primary market operations
likewise etps backed by platforms that leverage technology and scale
are more likely to efficient process efficiently process etp primary market activity so basically
they're in a constant state of creation and redemption because they're stuck in there because
they're constantly having to keep the nav aligned and the x tesla fund is how it's able to be so
much lower than GameStop while GameStop is the number two holding so it's i guess it's this big
uh you know big tactical operation to try and uh you know keep everything at bay but despite
their own definitions here doesn't seem that they're trading ijr very efficiently to me so
that's the whole point of this video hope it taught you something time to get baked