By Tony Dong, CETF®, Lead ETF Analyst· February 13, 2023
Last year’s dark horse ETF trend – and one we’re seeing carry through into 2023 – wasn’t the launch of meme ETFs like the inverse Cramer ETF or the MeetKevin ETF. Rather, it was the decision of numerous issuers to migrate their ETFs from the NYSE's electronic trading platform, Arca, to the actual exchange floor.
PIMCO kicked off the trend on November 14th, 2022 by transferring its popular actively managed fixed-income ETF, the PIMCO Active Bond Exchange-Traded Fund (BOND). This move was followed by Harbor Capital Advisors, who moved three ETFs on January 3rd, 2023, and THOR Financial Technologies LLC, who moved the THOR Low Volatility ETF (THLV) on February 1st, 2023. All of the aforementioned ETFs are now enjoying the support of a Designated Market Maker (DMM) on the NYSE floor.
To understand the behind-the-scenes dynamics of this shift, I interviewed Douglas Yones, ChFC. Douglas is the Head of Exchange Traded Products at the NYSE, where he oversees the listings and operations teams responsible for the exchange-traded products, close-ended funds, and SPAC businesses.
Douglas Yones (DY): The decision was many years in the making. Prior to its historic listing on the NYSE floor, BOND was listed on NYSE Arca, our electronic market, since its inception in 2012.
However, in recent years, we began to see more opportunities for improvement with electronic markets, particularly when it came to ensuring liquidity during the opening and closing auctions. ETF issuers were informing advisors on the best times to trade/not trade, being cautious around open/close, etc. We realized that by moving ETFs to the floor, then we could address these pain points with our best-in-class human element, the DMM.
We work closely and partner with many of our ETF issuers, including PIMCO, as we work through new and innovative solutions to improve and enhance the overall ecosystem and investor experience. We see the new NYSE floor model as an opportunity to do just that, with PIMCO as the first active ETF to enjoy the benefits.
DY: The DMM is the heart of the NYSE floor model. Their contributions cannot be understated. These experts have a variety of responsibilities when it comes to their assigned securities, including facilitating price discovery, adding liquidity, smoothing out volatility, and providing price improvements. In particular, they play a large role in managing opening and closing auctions where liquidity is paramount.
The input of a DMM helps ETFs trade on the NYSE floor as closely as possible to their net asset value (NAV). The presence of a human provides invaluable oversight and judgment. We've seen a measurable and marked improvement already in many cases. For example, BOND's move resulted in a 57% reduction in spreads and a 93% reduction in price dislocation following the opening auction. That's the benefit for issuers and investors.
This improvement is all the more notable when you realize that prior to its move, BOND was already an exemplary fund with excellent liquidity and low spreads. It would have been easy for us to cherry-pick a less popular ETF to highlight the performance gap post-move. However, BOND was a great test to prove that even popular and strong ETFs can benefit from moving to the NYSE floor.
Transitioning an ETF to the floor also benefits the end investor as well, which we always consider as being one of the most important stakeholders in this process. The floor model lets ETF investors enter and exit positions less expensively, especially during the opening and closing auctions where many advisors running model portfolios like to trade instead of piecemealing it intraday.
DY: We've seen a mixture of asset classes and management styles. For example, Harbor Capital Advisors’ offerings provide a unique blend of equity strategies and a commodity ETF, while THOR's offering has a low-volatility focus. We really didn’t know what to expect with the PIMCO move, but it's been very exciting and positive seeing others follow their example in such a short time.
The point we want to emphasize to ETF issuers considering a similar move is that everyone is welcome on the NYSE floor, regardless of your firm’s size. We have PIMCO, which manages $2 trillion in AUM and THOR, which is a single-ETF issuer. Our goal with these moves is to democratize the resources of the world’s premier exchange for all ETF issuers. We do this because, at the end of the day, investors benefit from better order execution and price discovery.
DY: ETFs have seen an unbelievable rate of growth. The launch of SPY started a trend that fundamentally democratized investing. When I started in the industry, you couldn’t invest in a mutual fund unless you had at least $5,000. It was off-putting to younger and low-net-worth investors. Now, my teenage children have the ability to invest in ETFs from their phones with their allowance and part-time job income, commission-free. There have also been immense cost reductions from lower expense ratios and improved tax-efficiency.
Despite not changing much since 1993, the ETF structure has proven to be incredibly adaptable and versatile. Advancements in the ETF industry have opened up asset classes like high-yield bonds, commodities, and derivatives to everyday investors. Thematic investing allows the layperson to invest based on their beliefs without the need for detailed security analysis. Even institutional investors benefit from ETFs that deliver exposure to exotic assets or strategies in a low-cost, liquid, and transparent structure. Some of the products we're seeing on the market today are doing things that were traditionally only accessible to very sophisticated investors.
DY: I'm excited about how industry participants are seeing the value of, and investing in, education. An example is the work we're doing with ETF Central. The services on this platform, from the data, the screener, and the analysis have been made accessible to a wide audience of investors. More parties are willing to collaborate to make data available and put in time and money to make it digestible and meaningful for the layperson.
I'm also excited about the acceleration of a trend we've seen pick up in recent years - mutual fund conversions. For many years, it was relegated to the realm of "could this happen?". Then all of a sudden, we saw 35 mutual fund conversions in 2021 and 2022 totaling $56 billion AUM. There are thousands of mutual funds out there that would better serve investors by converting to the ETF structure. We're just at the beginning of this conversion - my expectation is that this number will grow more and more to the benefit of investors.
Source: EFT Central