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The Institutional ETF Toolbox: How Institutions Can Understand and Utilize the Fast-Growing World of ETFs


Praise for The Institutional ETF Toolbox

"Eric has done something most people would have thought impossible—he's made the world of ETFs and institutional investment management actually entertaining. Eric does more than just recite statistics and explain mechanics, he explores why ETFs have become the dominant financial tool of a generation. Whether you're a buy-side portfolio manager or a curious novice, you'll walk away from this book smarter than when you cracked the cover."
—Dave Nadig, Director of Exchange-Traded Funds, FactSet Research Systems

"Balchunas has provided 'The Missing Manual' for the ETF industry. If you invest with ETFs, you need this book!"
—David Abner, Head of Capital Markets, WisdomTree Asset Management

"Eureka! Eric has accomplished what no previous authors have accomplished—writing the ultimate ETF resource that is timely, informative, and useful for both amateurs and professionals. Read it."
—Wesley Gray, CIO, Alpha Architect

"The ETF market has grown from its simple beginning as a convenient way to trade a basket of stocks into a vast line-up of products that have multiple applications and uses. Eric's book is a vital resource for institutional investors seeking to solve portfolio problems and gain efficiency using these marvelous tools."
—Rick Ferri, Founder, Portfolio Solutions

Eric Balchunas is a senior ETF analyst at Bloomberg, where he has more than a decade of experience working with ETF data, designing new functions, and writing ETF research for the Bloomberg terminal. He also writes articles, feature stories, and blog posts on ETFs for and appears each week on Bloomberg TV and Radio to discuss ETFs.

Acknowledgments xiii

Introduction: Institutions and ETFs xv


CHAPTER 1 Why Are ETFs So Popular? 3

Low Cost 4

Liquidity 6

Tax Effi ciency 8

Transparency 9

Diversification 11

Easy Asset Allocation 13

Standardization 14

Democratic 16

No Emotion 17

Passive Investing 17

Flexibility 19

Anonymity 20

Price Discovery 21

Fiduciary Vehicles 23

Battle Proven 24

Convenience 24

Notes 25

CHAPTER 2 ETF Growth 27

Asset Growth 27

ETF Assets in Perspective 29

Trading Growth 30

Product Growth 34

Notes 36

CHAPTER 3 ETF Mechanics 37

The Story of the ETF 38

The Creation/Redemption Process 42

AMEX Wasn’t Alone 44

Finally Ready for Launch 46

Notes 51

CHAPTER 4 Institutional Usages 53

Cash Equitization 55

Manager Transitions 60

Portfolio Rebalancing 63

Portfolio Completion 63

Liquidity Sleeves 64

Shorting/Hedging 66

Long and Lend 70

Tactical Moves 72

In-Kind Creation/Redemption 74

Bespoke ETFs 77

Tax-Loss Harvesting 82

Long-Term Allocation 83

Personal Usage 87

Notes 89

CHAPTER 5 ETF Due Diligence 91

Exposure 93

Cost 100

Liquidity 119

Risk 130

Regulatory Structure 133

ETF Issuers 136

ETF Ratings 138

Notes 140


CHAPTER 6 U.S. Stock ETFs 145

Large Caps 146

Mid Caps 155

Small Caps 156

Broad Market 159

IPOs 162

Sector and Industry ETFs 165

The Tech Sector 166

Industries 175

Thematic ETFs 180

Notes 189

CHAPTER 7 Smart Beta 191

Controversy 192

Smart Beta versus Active Management 193

Growth and Value 196

Fundamentally Weighted ETFs 197

Single Factors 199

Notes 204

CHAPTER 8 International/Global ETFs 205

International Developed Markets 206

Global 209

Emerging Markets 212

The First Movers 212

Second-Generation EM 217

Next-Generation EM ETFs 221

Currency-Hedged ETFs 225

Single-Country ETFs 233

China 241

Notes 248

CHAPTER 9 Fixed Income 251

Regulations 253

Aggregate Bond ETFs 258

Treasuries 261

Mortgage Backed Securities 267

Municipals 268

Corporate 270

Senior Loans 273

Interest Rate-Hedged ETFs 278

Multi-Asset Income ETFs 281

International Debt 282

Notes 284

CHAPTER 10 Alternatives 285

Hedge Fund Strategies (aka “Liquid Alts”) 286

Commodity ETFs 293

Physically Backed Commodity ETFs 293

Futures-Based Commodity ETFs 300

Notes 308

CHAPTER 11 Leveraged, Inverse, and VIX 309

Leveraged ETFs 309

The VIX 318

Notes 324

CHAPTER 12 Actively Managed ETFs 325

Fixed Income 327

Equity 329

Notes 334

Conclusion: Five Takeaways 335

Note 340

About the Author 341

Index 343