Regular intraday trading creates an efficient secondary market for the ETF while using price discovery to ensure that on-screen prices accurately reflect the value of the holdings of the fund.
In fast markets, there is even evidence that ETF prices are a more accurate indication of the pricing of the underlying bond basket than any data service or trading desk can provide.
Also, very importantly, long-term investors do not suffer the gyrations of the ETF’s bid-offer. If new investors trigger a creation or departing investors result in a redemption, the trading costs of their entry/exit are passed directly to them, rather than impacting the fund.
There is one theoretical concern about passive investing that equity investors have spent a lot of time contemplating.
Is there a point when the market’s shift to passive turbo charges momentum and gives power back to active investors not caught up in the vicissitudes of index rebalances?
General calculations in equity suggest more than 25 per cent of assets are managed passively. Is this close to the point when the pendulum swings in favour of independent managers not tied to any benchmark?
No one is sure. What they do know is that in fixed income around 5 per cent of assets are managed passively so we are nowhere near this inflection point.
Michael John Lytle is chief executive of Tabula Investment Management
