(PUB) Investing 2015

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15 Morningstar FundInvestor September 2015
a large driver of what ultimately manifests itself in the
form of these disconnects between the ETF price and
the underlying net asset value. Market makers were
facing an extreme amount of risk, knives were falling
everywhere, and I think what you saw is that, in all
likelihood, many of the market makers either stepped
away from the market, stopped quoting prices, or they
widened out their bid-and-offer spreads.
“Now all of this ultimately resolved within the course of
an hour or so, but what you saw was extreme risk,
and in the face of extreme risk and in extreme uncer-
tainty, in a fast-moving environment, it was probably
really ultimately a multitude of different factors that
led to these yawning disconnects between the ETF
price and the price of the underlying security. If you
absolutely must trade an ETF during times like those
that we experienced on Monday, use a limit order,
because it allows you to name your price. If you use a
market order or if you use, say, a stop-loss order,
which are the orders that tend to be affected and ulti-
mately executed in times like these, you are subject
to the whims of whatever is being quoted during these
times of distress.
“So what we saw on Monday and what indeed we saw
during the flash crash is that, with a stop-loss order,
it becomes a market order once that stop-loss price is
crossed. So when the market drops, it becomes a
market order and executes at whatever the going price
is, which, in the case of Monday morning, were some
very poor prices.
“Now, it’s not clear if any trades were executed at
those prices, [and], if they were executed, whether or
not they will ultimately be reversed or busted.
But using a limit order allows you to avoid all of these
considerations entirely, to name your price.
“This is a reminder that it takes ETF s a while to wake
up in the morning because it takes a lot of their
underlying securities to wake up and be really actively
traded in their early morning trading hours. So that
first half hour of trading tends to be not necessarily
volatile, but volumes tend to be thin, takes a while for
a lot of the underlying stocks to really begin actively
trading hands. So, the best pricing, the greatest depth,
the most liquidity you are going to see tends to take
place between the time one half hour after the market
opens and one half hour before the market closes
because, as the market moves toward its close, many
market makers tend to settle up their books, they’ve
hedged their risk for the day, and they tend to step
back from the market.
“So if you can kind of carve those two half hours out of
your trading window if you are looking to trade an ETF,
that’s also advisable, and certainly on Monday trading
during the first half hour was again extremely chaotic.”
Redemptions Accelerate in August
Initial reports suggest fund investors pulled out about
$10 billion from U.S. equity funds in the next to last
week of August as the China swoon spurred some to
rush for the exit.
Investors were starting to head for the exits in July.
For U.S. equity funds, net outflows were $14.5 billion
for open-end and ETF s combined. That was offset by
the $21.3 billion in net inflows for foreign-equity funds.
Allocation funds were also in net redemptions with
$2.2 billion in outflows in July. Muni bonds and
taxable bonds had slight inflows of less than $1 billion.
The firms with the greatest inflows in July were
Vanguard ($15 B), State Street ($7.4B), iShares ($6.9B),
Bridge Builder ($5.4B), and DFA ($2.8B).
The firms with the most outflows were Fidelity ($9.1B),
PIMCO ($4.6B), Franklin Templeton ($3.1B), Oppenhei-
emer ($1.7B), and T. Rowe Price ($1.3B).
Among actively managed open-end funds, PIMCO
Income PONDX ($1.2B), Metropolitan West Total
Return Bond MWTRX ($636M), Fidelity Select Bio-
technology FBIOX ($563M), American Funds
Europacific Growth AEPGX ($522M), and JHancock
Global Absolute Return JHAAX ($477M) had the
most inflows.
PIMCO Total Return PTTRX continued to have
the most outflows. The fund had $3 billion in net
redemptions in July. K