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Friday, June 28, 2013

The iNAV Debate Continues

News summary by MFWire's editors

Three publications picked apart the reasons for the ETF sell-off and frustrations over halting cash redemptions.

The debate over the usefulness of iNAVs continued this week, with IndexUniverse's Ugo Egbunike defending the measure. Though he admits the iNAV is not perfect, such as being susceptible to mispricings, giving a stale value for international ETFs and fixed income ETFs, the iNAV shouldn't be kaput. It should upgraded from a 15 second interval in ETF pricing to a 1 second interval.

Egbunike argues that investors should change their methodology when moving outside stock ETFs to fixed-income, international equity and community based ETFs. It would be best if regulators provided the public with fair valued iNAV quotes.

The real problem, he argues, is that some investors treat ETFs exactly like stocks. Investors should understand the complexity of ETFs and think differently about how to trade them:
Unfortunately, many investors treat ETFs like stocks: “I need to purchase an ETF now, so I’ll use a market order”; or “I’m interested in using liquidity as a filter, so I’ll use the bid/ask spread to determine what I can buy.” All—and I do mean all—of these assumptions are wrong.
The Financial Times wrote an explanatory piece, examining why the ETF market experienced a bottleneck last week. Investors should remember that creations and redemptions can take more than one day, spending on global time zones and the liquidity of the underlying assets.

On the bond ETF front, Rick Ferri discourages investors from buying bond ETFs if they want to avoid the Bond ETF Discount problem when markets experience volatility and investors sell off ETFs en masse.

If you would like to read more, click , here and here and here

Edited by: Casey Quinlan

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