Alpha Architect

Why Advisors (and Family Offices) Should Consider Creating their Own ETFs

By Pat Cleary|November 4th, 2022|ETF Operations, Tax Efficient Investing, ETF Investing|

Independent RIA firms seek to do what is "right" for the client, which often boils down to minimizing fees and taxes and increasing transparency/education (i.e., ETFs). But the "right" solution for an advisor's clients might not be available 'off-the-shelf' in the ETF market, or the advisor can't use ETFs because they are stuck "managing around" legacy portfolios and tax problems.

What's the solution? Allow advisors to create their own ETFs, which can be customized to deliver the specific investment program the advisor desires and allows an advisor to offer unique solutions for legacy tax issues tied to low-basis securities.

Should Levered and Inverse ETFs Even Exist?

By Tommi Johnsen, PhD|September 21st, 2022|Research Insights, Basilico and Johnsen, Academic Research Insight, ETF Investing|

In this article, we explore Levered and Inverse ETPs (exchange-traded products); their purpose, the circumstances in which they tend to succeed and fail, and the research questions associated with them.

Can You Keep Your Track Record After an ETF Conversion?

By Pat Cleary|August 26th, 2022|ETF Operations, Research Insights, ETF Investing|

Here is the bottom line: converting into the ETF structure can bring a lot of benefits to the table, but porting your official track record over to an ETF can be challenging.

However, even if the facts and circumstances of your situation suggest that porting your official track record into an ETF is impossible, all is not lost. Retail consumers, institutional investors, platform providers, gate-keepers, and so forth, will likely be aware of your previous performance and reputation as an asset manager/advisor and they can often read between the lines. For example, if an advisor has been running the "ACME US Dividend Strategy" for 20 years, and this same advisor launches the "ACME US Dividend ETF" with the same investment process and investment objective, it doesn't take a rocket surgeon (or a brain scientist) to figure out that the ETF is probably a more tax-efficient version of the old strategy.

Wes Discusses Merging Education, Investing, and the Marines w/ Lagniappe Podcast

By Wesley Gray, PhD|July 5th, 2022|Factor Investing, Podcasts and Video, Tax Efficient Investing, ETF Investing|

In this episode, Wes talks with Doug and Greg about why Alpha Architect is abnormal, the method to their madness, how Wes challenged Eugene Fama (and nearly won), how Alpha Architect is responding to today’s volatile markets, and what the future looks like for value investors.

Arbitrage and the Trading Costs of ETFs

By Larry Swedroe|June 16th, 2022|Transaction Costs, Research Insights, Larry Swedroe, Academic Research Insight, ETF Investing|

This article examines ETF creations and redemptions around price deviations and finds that the expected arbitrage trades are relatively rare in a broad sample of equity index ETFs. In the absence of these trades, price deviations persist much longer. Creation and redemption activity appears to be constrained when exchange conditions would lead to a costlier arbitrage trade, and the size of the price deviations mainly impact the likelihood rather than the amount of trading. The authors also find some evidence that creations and redemptions are less likely to trade on price deviations when they would be required to trade the underlying stocks against broad market movements. Their results suggest that several factors may discourage the built-in ETF arbitrage mechanism and that investors may receive poorer trade execution in these conditions as a result.

Options Hedging & Leveraged ETFs in Market Swings

By Andrea Barbon|June 1st, 2022|Options, Research Insights, Guest Posts, Academic Research Insight, ETF Investing|

Earlier this year, GameStop stock rose like crazy in only a few hours with the effects of broker-dealer options hedging spurred by retail investor buying pressure. And from February to March 2020, options trading activity was also pointed to as a contributor to stock swings in the Covid-19 selloff. The market dropped 30% and then recovered quickly over the following weeks. It has been documented that the need for market makers to hedge their positions with options (given rapid changes in stock prices) can contribute to market and stock price swings. However, might there be other factors also at play in these types of stock and market fluctuations?

Can Market Maker Capital Constraints Result in Mispricing of ETFs?

By Tommi Johnsen, PhD|April 18th, 2022|Research Insights, Basilico and Johnsen, Academic Research Insight, ETF Investing|

Capital constraints of financial intermediaries can affect liquidity provision. We investigate whether these constraints spillover and consequently cause contagion in the degree of market efficiency across assets managed by a common intermediary. Specifically, we provide evidence of strong comovement in pricing gaps between ETFs and their constituents for ETFs served by the same lead market maker (LMM). The effects are stronger for ETFs that are more illiquid and volatile, when the underlying constituents of the ETFs are more costly to arbitrage, and for LMMs with more constrained capital. Using extreme disruptions in debt markets during COVID-19 as an experiment, we show that non-fixed income ETFs serviced by LMMs managing a larger fraction of fixed income ETFs experience greater pricing gaps. Overall, our results indicate that intermediaries’ constraints indeed influence comovements in pricing efficiencies.

Shorting ETFs: A look into the ETF Loan Market

By Elisabetta Basilico, PhD, CFA|April 11th, 2022|Transaction Costs, Research Insights, Basilico and Johnsen, Academic Research Insight, ETF Investing|

We find that exchange-traded fund (ETF) lending fees are significantly higher than stock lending fees. Two institutional features unique to ETFs play significant roles in explaining the high fees. First, regulations restrict investment companies, such as mutual funds and ETFs, from owning ETFs. As these institutions are key lenders, their absence reduces the lendable supply in the ETF loan market. Second, while the create-to-lend (CTL) mechanism alleviates supply constraints when borrowing demand increases, its efficacy is limited by the associated costs and frictions. Our results speak to the limits to arbitrage in the ETF markets.

ETF Tax Efficiency isn’t Always Efficient

By Sean Hegarty|February 25th, 2022|Research Insights, Guest Posts, Tax Efficient Investing, ETF Investing|

Compared to mutual funds or separately managed accounts, ANY benefit from redeeming in-kind is a bonus. That being said, not all ETFs and situations are created equal when it comes to tax efficiency, and the "golden rule" always applies - when given the option, the IRS wants to create scenarios where they receive tax dollars now instead of later. Here are some big-ticket items that cause inefficiencies (read as taxes…), many related to the “golden rule” above.

Important Insights Into Index Versus Active ETF Management

By Wesley Gray, PhD|January 20th, 2022|ETF Operations, Research Insights, ETF Investing|

can be boiled down to the following: Index ETFs come with increased transparency and marketability; Active ETFs come with lower operational costs and increased portfolio management flexibility.

Should I launch an Active ETF or Index ETF?

By Pat Cleary|January 7th, 2022|ETF Operations, Research Insights, ETF Investing|

summary, there are no right answers when it comes to launching an active or an index ETF. However, by understanding the basics of the regulatory landscape and the costs/benefits of each approach, both consumers and ETF operators can make more informed decisions. Thanks for reading!

What Do Mutual Fund Investors Really Care About?

By Larry Swedroe|January 6th, 2022|Research Insights, Larry Swedroe, Academic Research Insight, Behavioral Finance, ETF Investing|

Are individuals just naïve performance chasers, unaware of the financial literature, or are they sophisticated investors? Pretty much.

How to Start an ETF? Resources and FAQ

By Pat Cleary|November 16th, 2021|ETF Operations, Research Insights, Key Research, Tax Efficient Investing, ETF Investing|

We get the following question at least 1x a day: "How do I start an ETF? Because we have so many requests for information on the topic of "How to Start an ETF?", Wes asked that I compile a list of materials on the topic and a "FAQ" to address all of your burning questions.

Can you do a tax-free conversion of a mutual fund into an ETF?
Can you do a tax-free conversion of SMAs (separately managed accounts) into an ETF?
Can you do a tax-free conversion of a hedge fund into an ETF?

Long story short, yes, yes, and yes...but it's complicated!

12 Next