Increasingly Large Spreads with NTSX

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jt4
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Increasingly Large Spreads with NTSX

Post by jt4 » Tue Feb 11, 2020 10:23 am

I've observed some weird behavior with the bid/ask spreads of NTSX, the Wisdom Tree 90/60 SP500/Tresuries fund. (A lot of us like this fund because it holds treasury futures, which we believe will reduce the overall volatility of the fund.)

For a while, I noticed that the spreads were continually shrinking to about ~$0.05, but recently they have grown to ~$0.14.

OK, $0.14 is not that big of a deal... BUT, this is about 0.5% of the $30 trade price. So entering and exiting this position will cost you about 0.5% now! (half the spread to enter + half the spread to exit = the whole 0.5% spread)

The AUM of NTSX has varied between $55M and $35M and is currently ~$44M (as of today) so it hasn't varied that much, at least in regards to the spread!
___

Here's my understanding: Most of the trading volume is between clients and the market maker (Jane Street), not between clients.

Do ETF providers contractually obligate the market maker to provide a certain spread or is this determined by market conditions?

pepys
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Re: Increasingly Large Spreads with NTSX

Post by pepys » Tue Feb 11, 2020 10:31 am

Every time I have bought it so far (with market orders) it has bought between the stated spread, for what it's worth. I still don't really understand how the process works, but it seems like the brokerage, when doing price improvement, finds a market maker who will sell very close to the price of the underlying assets.

senex
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Re: Increasingly Large Spreads with NTSX

Post by senex » Tue Feb 11, 2020 10:46 am

jt4 wrote:
Tue Feb 11, 2020 10:23 am
Do ETF providers contractually obligate the market maker to provide a certain spread or is this determined by market conditions?
I don't know of any such obligations.

The reason is economics: a combination of the creation unit size (typically 50k shares; haven't looked up NTSX specifically) and the trading costs of the authorized participants ("APs" -- the companies authorized to create/redeem ETF shares). For low-volume etfs, it may take the AP many days (or even weeks) to accumulate enough position to create or redeem ETF shares. In the mean time, it costs the AP money to hold the positions (financing and/or borrow costs). It also costs money for them to do the create/redeem operation itself, and when creating only 1 unit (typical for low-volume etfs), the fixed costs are amortized over fewer shares than if they created, say, 20 units at a time.

To compensate for these elevated costs, it takes a wider spread for it to be profitable. (The spread can also vary with underlying spreads & liquidity, which presumably is not an issue for the treasuries in this case, but I haven't checked).

muffins14
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Re: Increasingly Large Spreads with NTSX

Post by muffins14 » Tue Feb 11, 2020 12:04 pm

If you had a time series of this it would help make your point. As of right now the spread is 7 cents

alex_686
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Re: Increasingly Large Spreads with NTSX

Post by alex_686 » Tue Feb 11, 2020 12:06 pm

jt4 wrote:
Tue Feb 11, 2020 10:23 am
Do ETF providers contractually obligate the market maker to provide a certain spread or is this determined by market conditions?
No, they really can’t. There is a exception to “prime the pump” for newly launched funds, but that would have to be disclosed.

ChrisBenn
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Re: Increasingly Large Spreads with NTSX

Post by ChrisBenn » Tue Feb 11, 2020 5:04 pm

muffins14 wrote:
Tue Feb 11, 2020 12:04 pm
If you had a time series of this it would help make your point. As of right now the spread is 7 cents
At this point you could also just look at the premium/discount, which wisdom tree has on the fund site - https://www.wisdomtree.com/etfs/asset-allocation/ntsx +0.11%; the daily values are listed there.

MotoTrojan
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Re: Increasingly Large Spreads with NTSX

Post by MotoTrojan » Tue Feb 11, 2020 5:23 pm

pepys wrote:
Tue Feb 11, 2020 10:31 am
Every time I have bought it so far (with market orders) it has bought between the stated spread, for what it's worth. I still don't really understand how the process works, but it seems like the brokerage, when doing price improvement, finds a market maker who will sell very close to the price of the underlying assets.
+1. Realized discount/premium to NAV is all that really matters, and given how liquid the underlying assets are I would be surprised if it were significant.

Topic Author
jt4
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Re: Increasingly Large Spreads with NTSX

Post by jt4 » Tue Feb 11, 2020 5:45 pm

MotoTrojan wrote:
Tue Feb 11, 2020 5:23 pm
+1. Realized discount/premium to NAV is all that really matters, and given how liquid the underlying assets are I would be surprised if it were significant.
Agreed. But, the premium/discount to NAV quoted on the WisdomTree site assumes you execute your trade at the midpoint between bid/ask, which I don't expect to achieve in practice.

I'm not sweating this, just trying to understand it. :D

ChrisBenn
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Re: Increasingly Large Spreads with NTSX

Post by ChrisBenn » Tue Feb 11, 2020 6:33 pm

jt4 wrote:
Tue Feb 11, 2020 5:45 pm
(...) the premium/discount to NAV quoted on the WisdomTree site assumes you execute your trade at the midpoint between bid/ask (..)
Yikes, I posted a link above and I didn't even catch that, mea culpa; I had just assumed that the premium discount would be what people actually paid vs. nav at the time of order fulfillment.

guyinlaw
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Re: Increasingly Large Spreads with NTSX

Post by guyinlaw » Tue Feb 11, 2020 9:33 pm

I buy small quantity most months, have found the execution fine. I was fretting about bid/ask spreads, sometimes I seemed to buy at sight premium, and sometimes at discount. As I plan to hold these for a very long time, I am not worrying about the spread.

Another boglehead purchased $400k worth on one-day, and it went smooth. The underlying assets are very liquid and AUM is increasing well to over 43M over the last 5 weeks. Retail investors seem to be adding into their IRAs..
Reminder to myself "If you're not willing to react with equanimity to a marketplace decline, of 50%, 2-3 times a century, you deserve the mediocre result you will get"-Charlie Munger

stormcrow
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Re: Increasingly Large Spreads with NTSX

Post by stormcrow » Wed Feb 12, 2020 12:04 pm

guyinlaw wrote:
Tue Feb 11, 2020 9:33 pm
I buy small quantity most months, have found the execution fine.
Same here, have been adding it in little chunks, no issues at all on it so far.

rascott
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Re: Increasingly Large Spreads with NTSX

Post by rascott » Wed Feb 12, 2020 12:55 pm

I bought some more today. Instant execution of market order.... again right in the middle of the bid/ask spread (which was pretty large)

Lee_WSP
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Re: Increasingly Large Spreads with NTSX

Post by Lee_WSP » Wed Feb 12, 2020 12:57 pm

It's at $0.05 spread at the height of trading right now. Doesn't seem to be a problem. Much better than TYD which has larger spreads and much less volume.

Topic Author
jt4
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Re: Increasingly Large Spreads with NTSX

Post by jt4 » Wed Feb 12, 2020 1:04 pm

Thanks all on your experiences with market orders. Good to know...!

caklim00
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Re: Increasingly Large Spreads with NTSX

Post by caklim00 » Wed Feb 12, 2020 3:32 pm

Does anyone see value in diversification of Treasury Futures lengths (similar to what NTSX does)? I'm about ready to buy some more equity (VFMF likely) in taxable and since I'm tilting and not using NTSX I'm probably close to adding another contract. Too this point I've stuck with ZN 10 Year, but wondering if it makes sense to diversify to 5 year, Ultra 10 Year, etc. Seems like it would just add one additional roll.

Topic Author
jt4
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Re: Increasingly Large Spreads with NTSX

Post by jt4 » Wed Feb 12, 2020 4:13 pm

caklim00 wrote:
Wed Feb 12, 2020 3:32 pm
Does anyone see value in diversification of Treasury Futures lengths (similar to what NTSX does)? I'm about ready to buy some more equity (VFMF likely) in taxable and since I'm tilting and not using NTSX I'm probably close to adding another contract. Too this point I've stuck with ZN 10 Year, but wondering if it makes sense to diversify to 5 year, Ultra 10 Year, etc. Seems like it would just add one additional roll.
I've done a lot of reading about Treasury Future duration for the best risk parity against the SP500. It seems that historically the 2-year treasury contract gives the best Sharpe ratio (return adjusted by risk)*. What I do is leverage up 2-yr contracts to give ~the same risk parity as my equity holdings. Of course, since 2-yr contracts are less volatile, you have to hold more 2-yr contacts than 10-yr contacts...

But I also get some treasury duration diversity by holding NTSX.

[Note that the 2-yr contact size is double that of other treasury durations, so the absolute volatility of one 2-yr contract is similar to one 5-yr contract.]

*Yield Curve Carry

caklim00
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Re: Increasingly Large Spreads with NTSX

Post by caklim00 » Wed Feb 12, 2020 4:38 pm

jt4 wrote:
Wed Feb 12, 2020 4:13 pm
caklim00 wrote:
Wed Feb 12, 2020 3:32 pm
Does anyone see value in diversification of Treasury Futures lengths (similar to what NTSX does)? I'm about ready to buy some more equity (VFMF likely) in taxable and since I'm tilting and not using NTSX I'm probably close to adding another contract. Too this point I've stuck with ZN 10 Year, but wondering if it makes sense to diversify to 5 year, Ultra 10 Year, etc. Seems like it would just add one additional roll.
I've done a lot of reading about Treasury Future duration for the best risk parity against the SP500. It seems that historically the 2-year treasury contract gives the best Sharpe ratio (return adjusted by risk)*. What I do is leverage up 2-yr contracts to give ~the same risk parity as my equity holdings. Of course, since 2-yr contracts are less volatile, you have to hold more 2-yr contacts than 10-yr contacts...

But I also get some treasury duration diversity by holding NTSX.

[Note that the 2-yr contact size is double that of other treasury durations, so the absolute volatility of one 2-yr contract is similar to one 5-yr contract.]

*Yield Curve Carry
Interesting idea. My goal hasn't been risk parity with this but to allow me to increase my overall "bond allocation." Including futures market value, I'm sitting at 75/25 at the moment but could easily see myself going to 70/30 as I increase my equity allocation a bit.

That article talked a fair amount about eurodollars, but haven't considered that.

I'm guessing the financing cost of holding 2 year though is about double that of a 5 year though. Definitely some things to consider. Roll time is coming up soon so I'll wait till then before making any changes.

guyinlaw
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Re: Increasingly Large Spreads with NTSX

Post by guyinlaw » Wed Feb 12, 2020 10:52 pm

Thank you for sharing the paper..

I buy 2y and 5y treasury futures.. I have bought 10y futures in the past, now hold 2y and 5y only..
Reminder to myself "If you're not willing to react with equanimity to a marketplace decline, of 50%, 2-3 times a century, you deserve the mediocre result you will get"-Charlie Munger

Topic Author
jt4
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Re: Increasingly Large Spreads with NTSX

Post by jt4 » Thu Feb 13, 2020 8:03 am

caklim00 wrote:
Wed Feb 12, 2020 4:38 pm

I'm guessing the financing cost of holding 2 year though is about double that of a 5 year though. Definitely some things to consider. Roll time is coming up soon so I'll wait till then before making any changes.
The analysis of the paper includes the cost of financing as that's the whole premise of yield curve carry. (Please correct me if I'm mistaken.)

mjb
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Re: Increasingly Large Spreads with NTSX

Post by mjb » Thu Feb 13, 2020 10:27 am

guyinlaw wrote:
Wed Feb 12, 2020 10:52 pm
Thank you for sharing the paper..

I buy 2y and 5y treasury futures.. I have bought 10y futures in the past, now hold 2y and 5y only..
What would you suggest as a good resource for learning more.

I have mostly seen high level commentary but no detailed guides.

Also,.what are you doing now that the yield curve is inverted?

guyinlaw
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Re: Increasingly Large Spreads with NTSX

Post by guyinlaw » Thu Feb 13, 2020 10:41 am

mjb wrote:
Thu Feb 13, 2020 10:27 am
guyinlaw wrote:
Wed Feb 12, 2020 10:52 pm
Thank you for sharing the paper..

I buy 2y and 5y treasury futures.. I have bought 10y futures in the past, now hold 2y and 5y only..
What would you suggest as a good resource for learning more.

I have mostly seen high level commentary but no detailed guides.

Also,.what are you doing now that the yield curve is inverted?
https://coexpartnersaig.files.wordpress ... carry.pdf

Shared above.

There is another thread about this from earlier.
Reminder to myself "If you're not willing to react with equanimity to a marketplace decline, of 50%, 2-3 times a century, you deserve the mediocre result you will get"-Charlie Munger

mjb
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Re: Increasingly Large Spreads with NTSX

Post by mjb » Thu Feb 13, 2020 1:35 pm

guyinlaw wrote:
Thu Feb 13, 2020 10:41 am
mjb wrote:
Thu Feb 13, 2020 10:27 am
guyinlaw wrote:
Wed Feb 12, 2020 10:52 pm
Thank you for sharing the paper..

I buy 2y and 5y treasury futures.. I have bought 10y futures in the past, now hold 2y and 5y only..
What would you suggest as a good resource for learning more.

I have mostly seen high level commentary but no detailed guides.

Also,.what are you doing now that the yield curve is inverted?
https://coexpartnersaig.files.wordpress ... carry.pdf

Shared above.

There is another thread about this from earlier.
Thank you. So with an inverted yield curve, are you just staying the course knowing you will lose out if the yield curve doesn't change?

caklim00
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Re: Increasingly Large Spreads with NTSX

Post by caklim00 » Thu Feb 13, 2020 1:43 pm

Based on this paper it suggests holding Eurodollar contracts not 2 year treasury futures. Is anyone doing that? Isn't there additional risk by holding eurodollars. It talks about minimizing transaction costs by holding the eurodollars over treasury futures.

Topic Author
jt4
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Re: Increasingly Large Spreads with NTSX

Post by jt4 » Thu Feb 13, 2020 2:02 pm

caklim00 wrote:
Thu Feb 13, 2020 1:43 pm
Based on this paper it suggests holding Eurodollar contracts not 2 year treasury futures. Is anyone doing that? Isn't there additional risk by holding eurodollars. It talks about minimizing transaction costs by holding the eurodollars over treasury futures.
I've thought a lot about this — the cost to buy/roll treasury futures is minimal (when you look at it in the grand scheme of things). For me, it's less than the cost of a single tick in the futures price...

I prefer 2-year treasuries because the front eurodollars contract spiked (in the wrong way) during the 2008 financial crisis. (But if you had held a stripe/block of eurodollar contracts, the overall effect would have been much less pronounced.) Overall, I think eurodollars would be fine, but I'm more comfortable with US treasuries.

The main takeaway that I get from that paper is that when constructed for the same duration, eurodollar and treasury futures perform nearly identically AND that historically, contracts with shorter duration have given better return vs risk than long term contracts.
____
The inverted yield curve means that we're "losing" money through yield carry in the short run; however, because interest rates have been dropping, this increases the value of the treasury contracts so that, overall, holding 2-yr treasuries has given an overall positive return over the past 6-mo to year (despite yield curve inversion).

caklim00
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Re: Increasingly Large Spreads with NTSX

Post by caklim00 » Thu Feb 13, 2020 2:52 pm

jt4 wrote:
Thu Feb 13, 2020 2:02 pm
caklim00 wrote:
Thu Feb 13, 2020 1:43 pm
Based on this paper it suggests holding Eurodollar contracts not 2 year treasury futures. Is anyone doing that? Isn't there additional risk by holding eurodollars. It talks about minimizing transaction costs by holding the eurodollars over treasury futures.
I've thought a lot about this — the cost to buy/roll treasury futures is minimal (when you look at it in the grand scheme of things). For me, it's less than the cost of a single tick in the futures price...

I prefer 2-year treasuries because the front eurodollars contract spiked (in the wrong way) during the 2008 financial crisis. (But if you had held a stripe/block of eurodollar contracts, the overall effect would have been much less pronounced.) Overall, I think eurodollars would be fine, but I'm more comfortable with US treasuries.

The main takeaway that I get from that paper is that when constructed for the same duration, eurodollar and treasury futures perform nearly identically AND that historically, contracts with shorter duration have given better return vs risk than long term contracts.
____
The inverted yield curve means that we're "losing" money through yield carry in the short run; however, because interest rates have been dropping, this increases the value of the treasury contracts so that, overall, holding 2-yr treasuries has given an overall positive return over the past 6-mo to year (despite yield curve inversion).
How many 2 year contracts do you hold? And, what notional value percentage vs equities?

The one nice thing about holding the 10 years for me as it basically simplified my equity/bond allocation. I treat 10 years as a true bond. 2 Year I might have to do some sort of duration calculation to determine my true bond allocation.

EDIT: I'm getting close to 30% bonds so I'm close enough where I could do a ladder similar to NTSX (1 each of 2 year, 5 year, 10 year, 10 year ulta, and tbond). Reduce bonds slightly in 401ks and get to a 1/3 US, 1/3 Foreign, 1/3 Bonds (mostly through futures, but still some bonds in 401k). Then just use 401k to rebalance. Appears to slightly juice returns since 2008 with similar drawdowns to 85% equity 15% bonds (which I was previously at). Heck, its not that much different than NTSX which is 60/40 except its all US LC where I'm tilting + holding foreign
Last edited by caklim00 on Thu Feb 13, 2020 4:01 pm, edited 2 times in total.

guyinlaw
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Re: Increasingly Large Spreads with NTSX

Post by guyinlaw » Thu Feb 13, 2020 3:44 pm

The main reason for holding treasury Futures is because they have a negative correlation with stocks. The reason is similar to holding TMF along with UPRO in the "excellent adventure."

Any additional benefit I get due to yield curve carry is just gravy. The paper discusses how 2y treasury (or eurodollar) is best in this regard.

Please see this thread with discussion about this topic.

viewtopic.php?f=10&t=273666&start=150
Reminder to myself "If you're not willing to react with equanimity to a marketplace decline, of 50%, 2-3 times a century, you deserve the mediocre result you will get"-Charlie Munger

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