Bank Loan ETF Fears Are Flawed

August 11, 2015

Greece ETF Perfect Example
But I'm not talking about bank loans at all. I'm talking about Greek equities. This is an extreme example of a disconnect between ETF and underlying security liquidity.

The Greek equity market was closed for five weeks until Aug. 3. So there was quite literally no liquidity for Greek equities. The GlobalX Greece ETF (GREK | C-59) traded almost 60 million shares of this same period.

And guess what? Investors in GREK survived just fine. If you use tracking error to pick ETFs, you might be screaming at me right now. GREK had an astronomical 121 percent of annualized tracking error over the last five weeks!

And this is exactly the type of tracking error we want as investors. GREK became the default proxy for the Greek equity markets. It was the only tool investors in the U.S. could use to trade Greek equities. Had these investors accessed the Greek companies directly, they would have been stuck with no way out.

The tracking error only existed because the index was stale. There were no trades in Greek equities for five weeks. And so there was no way for the index to update.

Lo and behold, when the Greek equity markets opened, the index and the ETF converged immediately. This confirms that the ETF was operating exactly as expected. The tracking error was due to issues with the index and so in no way should reflect poorly on GREK.

While this case study will in no way close the debate on bank-loan ETFs, we believe it illustrates in real time why the anti-bank-loan ETF arguments are flawed.


Newfound Research LLC is a Boston-based quantitative asset management firm focused on rules-based, outcome-oriented investment strategies. Newfound specializes in tactical asset allocation and risk management solutions. Founded in August 2008, Newfound offers a full suite of tactical ETF managed portfolios covering global equity, U.S. small-cap equity, multi-asset income, fixed-income and liquid alternative asset classes. For more information about Newfound Research LLC, call us at 617-531-9773, visit us at www.thinknewfound.com or email us at [email protected]. For a list of relevant disclosures, click here.

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