Jeff Feldman

Interactive Q&A: Jeffrey L. Feldman, Creator of HealthShares and Founder and Chairman of XShares Group LLC

Exchange Traded Fund liquidity is one of the most misunderstood concepts. Generally equity securities traded on exchanges are measured by Average Daily Trading Volume for liquidity and so by extension most investors and investment professionals measure ETF liquidity by volume. Because ETFs are open –ended and can be created daily, the true test for volume in ETFs is the liquidity of the underlying basket of stocks (constituent companies) held by the fund. Generally ETFs that hold large cap stocks will have a slightly higher liquidity than funds holding mid cap securities but this is based more upon investor preferences than any real liquidity issues.

We took this concept into consideration when we developed HealthShares and based upon our analysis we do not perceive liquidity issues in these funds and the underlying stocks unless and until there is well in excess of $1 billion in assets in each fund.

The creation and redemption process takes place generally by aggregating the constituent stocks, with an appropriate program trading desk or through their internal securities lending process, and assembling the baskets that can be deposited with the ETF custodian in order to create new ETF shares. The institutional investor can obtain the position it desires and the fund can accumulate significant assets even with low ADTV of the ETF shares themselves. This is the mechanism through which many institutional investors initially enter an ETF market and may involve the establishment of an Authorized Participant Agreement with the fund distributor. ALPS distributors, Inc. are the distribution agent for the HealthShares ETFs.

Finally many of the large Authorized Participants have ETF trading desks that will assemble the baskets and create high quality block executions for institutional investors without regard to the underlying Exchange Traded Fund’s ADTV. This opportunity exists for both creation and redemption of ETFs.