Wow, this is simply the best explanation I can find online! I'm surprised this video has relatively less views. But thanks to Graham Stephan this is going to be a hit!
i dont mean to be so offtopic but does any of you know of a trick to get back into an instagram account?? I was dumb forgot the login password. I love any help you can give me!
At 6:20 as a buyer, I should avoid buying ETF at $25.10 when I could buy $25 from the basket of shares from the market. Of-course as a retail it would be difficult for me operation wise to buy the basket of shares. But I also don't want to overpay ETF. But if I bid $25.00 for the ETF, I guess no one will sell it to me? So I have to bid slightly more than $25.00 for the AP or the ETF seller on the other side to make some bid-ask spreads. But how to avoid over-paying too much?
Is there any mechanism that ensures that two ETFs on the same index (e.g. MSCI world from ishares or vanguard) have the same price? What if one day for whatever reason nobody wants to buy from ishares but only vanguard. Will the prices of the ETFs still be the same because of the underlying stocks?
Did I understand it correctly that the underlying arbitrage "forces" a higher correlation between the underlying assets and ETF share prices, despite ETF share demand affecting the prices?
Good explanation. It however makes me wonder if the authorized participant is really able to create the buy/sell pressure in the market to bring the etf and the basket price closer. It sounds good on theory but I suspect there is going to be lot of arbitrage opportunities esp on less liquid ETFs.
Thank you really much for this video. I still have a question left, regarding minute 6:15 : How can this happen simultaneously? In my eyes the AP first has to buy the securities, gives them to the ETF-Company (which bundles these securities into ETF-Shares), takes them back from the ETF-Company and then sells them to a higher price of 25,10$. Isn't this the correct order? Or where do the ETF-Shares (which the AP sells for 25,10$) come from? Thanks in advance, have a nice day :)
This is 5 months late but hopefully it's relevant. If the market overprices the shares, the AP can short them (borrow shares from the issuer), then buy the stock basket, bring the stock basket to the ETF issuer, get the shares corresponding to the basket through the redemption part and clear the short position, netting a profit of 10 cents/share.
7:44 let me see if I got the redemption process: the AP buys the ETF shares at a discount on the open market, then gives them to the ETF company which in return delivers the corresponding shares of the underlying assets. Finally, the AP sells for the fair price on the open market the shares just redeemed from the ETF, thus gaining the difference between the ETF shares discounted price and the fair price of the underlying stocks... Am I right?
ok, then what is the limit the AP buy and sell. because if the ETF price goes down, the AP can wait and wait, or there is a limit on how much the AP can wait and increase his profit?
You mention creation/redemption with people buying and selling ETFs which is good. But what happens when the value of the underlying shares goes up or down?
Large brokers/dealers/institutional investors (e.g., Goldman Sachs, JPMC or other large bank) acting on behalf of the ETF sponsor in the creation/redemption process.
Yeah, there is a finite amount of stocks. Yet, ETFs are created the whole time how is it possible to match the finite supply of stocks with the unlimited supply of ETFs? I believe the ETFs are back up by nothing..
so when cathie wood of ARK says she doesnt deal with outflows, its actually a contrived statement. because the AP sells the shopping list of course. her statements here on youtube are technically correct, BUT A LIE. WHEN ARK HAS A REDEMPTION, THE UNDERLYING SHARES ARE SOLD BY THE AP IN THE MARKET.
Obvious Naked Short loophole is OBVIOUS! ... ETFs = NAKED SHORT LOOPHOLE via the basket creation process! ALSO, how are failure to delivers handled? durrrr
Using the word "authorized participant" is a mistake. There is no need to use complex/abstract language when teaching. You should have just said, the individual investor.
This is perhaps the best video on ETF to understand all the nuances.
Who is here from Graham’s most recent video? That vid and this one are both a 10/10
Agreed!
Wow, this is simply the best explanation I can find online! I'm surprised this video has relatively less views. But thanks to Graham Stephan this is going to be a hit!
I've been looking for this answer for literal months.
Thanks dude 😄
That makes 2 of us
I just watched this video three
times. Fantastic. Thank you for putting this together.
Was wondering the relation between etf share price and the price of the underlying stocks it holds.
Excellent. Best ETF explanation (and I’ve heard a few) I’ve seen/heard.
Excellent explanation! Thank you.
Was struggling with this cfa topic. Thanks!
Same here!
Same!
Same here for lv 3
What level of CFA covers this topic?
Thank you for the excellent explanation!
Thank you very much, your explanation was excellent and it was so useful for me.
i dont mean to be so offtopic but does any of you know of a trick to get back into an instagram account??
I was dumb forgot the login password. I love any help you can give me!
So we do read Graham's description, after all!
At 6:20 as a buyer, I should avoid buying ETF at $25.10 when I could buy $25 from the basket of shares from the market. Of-course as a retail it would be difficult for me operation wise to buy the basket of shares. But I also don't want to overpay ETF.
But if I bid $25.00 for the ETF, I guess no one will sell it to me?
So I have to bid slightly more than $25.00 for the AP or the ETF seller on the other side to make some bid-ask spreads.
But how to avoid over-paying too much?
Is there any mechanism that ensures that two ETFs on the same index (e.g. MSCI world from ishares or vanguard) have the same price? What if one day for whatever reason nobody wants to buy from ishares but only vanguard. Will the prices of the ETFs still be the same because of the underlying stocks?
Great Video!
Did I understand it correctly that the underlying arbitrage "forces" a higher correlation between the underlying assets and ETF share prices, despite ETF share demand affecting the prices?
how often are the constituent weights updated?
Regarding 3:10, technically, NAV is calculated (Assets - Liabilities) / Shares Outstanding
How much do APs make on average of NAV of a typical fund a year? It could be over 1%.
If the price of an ETf were to drop would that cause the stocks that make up that ETF to drop as well?
Yes, but works same as if price went down on all those underlying stocks.
Good explanation. It however makes me wonder if the authorized participant is really able to create the buy/sell pressure in the market to bring the etf and the basket price closer. It sounds good on theory but I suspect there is going to be lot of arbitrage opportunities esp on less liquid ETFs.
There is...that is how the price is changed. The owner or members will buy/sell shares to make money on the dif between market price and actual price
Thank you really much for this video. I still have a question left, regarding minute 6:15 :
How can this happen simultaneously? In my eyes the AP first has to buy the securities, gives them to the ETF-Company (which bundles these securities into ETF-Shares), takes them back from the ETF-Company and then sells them to a higher price of 25,10$. Isn't this the correct order? Or where do the ETF-Shares (which the AP sells for 25,10$) come from?
Thanks in advance, have a nice day :)
This is 5 months late but hopefully it's relevant. If the market overprices the shares, the AP can short them (borrow shares from the issuer), then buy the stock basket, bring the stock basket to the ETF issuer, get the shares corresponding to the basket through the redemption part and clear the short position, netting a profit of 10 cents/share.
@@mishoyanakiev4893 Thank so much that is extremely helpful
7:44 let me see if I got the redemption process: the AP buys the ETF shares at a discount on the open market, then gives them to the ETF company which in return delivers the corresponding shares of the underlying assets. Finally, the AP sells for the fair price on the open market the shares just redeemed from the ETF, thus gaining the difference between the ETF shares discounted price and the fair price of the underlying stocks... Am I right?
Yeah then when the arbitrage opportunity disappeared, Ap would stop redemption
ok, then what is the limit the AP buy and sell. because if the ETF price goes down, the AP can wait and wait, or there is a limit on how much the AP can wait and increase his profit?
Best video on etf
A very good explanation, found after working through dozens of Google 'finds' that were more interested in getting your email address! Thankyou
very well explained!
You mention creation/redemption with people buying and selling ETFs which is good. But what happens when the value of the underlying shares goes up or down?
The ETF value goes up and down accordingly?
very very very useful. Thanks
Great video! Who's this "authorized participant"?
Large brokers/dealers/institutional investors (e.g., Goldman Sachs, JPMC or other large bank) acting on behalf of the ETF sponsor in the creation/redemption process.
@@ruebenrobinson1479 omgosh! Thank you! ❤❤
So helpful thank you
At 4:57 how does 50k of SPY at $25 turn into $2.5million of Underlying Stocks?
Yeah, there is a finite amount of stocks. Yet, ETFs are created the whole time how is it possible to match the finite supply of stocks with the unlimited supply of ETFs?
I believe the ETFs are back up by nothing..
8:50 tax efficiency
This was a hard watch
I still don't quite get it.... Sorry... I'm not from finance background...
Thank you so much
so when cathie wood of ARK says she doesnt deal with outflows, its actually a contrived statement. because the AP sells the shopping list of course. her statements here on youtube are technically correct, BUT A LIE. WHEN ARK HAS A REDEMPTION, THE UNDERLYING SHARES ARE SOLD BY THE AP IN THE MARKET.
Graham crew here 😋
Obvious Naked Short loophole is OBVIOUS! ... ETFs = NAKED SHORT LOOPHOLE via the basket creation process! ALSO, how are failure to delivers handled? durrrr
Am I really the first to comment that Graham brought me here?
Lucid
Why can't anybody be an AP? Sounds like a middle man.
Using the word "authorized participant" is a mistake. There is no need to use complex/abstract language when teaching. You should have just said, the individual investor.
That is actually the correct term, retail investors cannot participate in the creation/redemption process.