The FV Shuffle: Giant ETF Trades? No Problem!

February 08, 2016

You’d think with the amount of hyperbole being thrown around about how ETFs are going to completely destroy global capitalism, flipping billions of dollars around inside the First Trust ETF complex might expose the cracks in the system—or at least raise a few eyebrows.

Instead, all it’s done is point out how resilient the ETF structure is.

The story’s pretty simple (as broken by Chris Dieterich at Barron’s on Friday).

The First Trust Dorsey Wright Focus 5 ETF (FV | C-43) has been the most successful launch in First Trust’s—and probably ETF—history. It’s sitting at over $3.6 billion in assets after less than two years. It’s an astonishingly simple fund. It simply holds the five First Trust sector funds that the classic Dorsey Wright methodology thinks are buys (based mostly on relative strength).

On Friday, FV rotated out of the First Trust NYSE Arca Biotechnology ETF (FBT | B-60) and into the First Trust Utilities AlphaDex ETF (FXU | B-85). Even if you don’t understand the Dorsey Wright methodology all that well, just knowing it’s basically a momentum strategy should make you understand from this chart.

Plenty of momentum in evidence here, just going the wrong way. Importantly, note that the fund has basically traded close to its net asset value (NAV) perfectly over this period. Also note that the volume on Friday was insane: 20 times higher than an average day.

The Trade

So how does a trade this large actually happen, especially when the fund doing the trading is an ETF, and the actual securities being traded are also ETFs?

Going into Friday morning, FV was 21.44% in FBT—21.44% of $3.682 billion is $789 million, or 44% of the $1.791 billion in FBT. Swapping one fund for another in a single day would gut FBT and double FXU, all in an instant. Surely this has to be a test of the very fabric of an ETF.

Here’s how FBT traded during the day, versus its intraday NAV:

Again, while it was definitely a down day for a while, note that the fund pretty much perfectly tracked iNAV, so at any point during the day, you were getting very close to the fair value of the underlying securities.

So why do we see this weird pattern of steady selling and then a sharp recovery? Because the actual trades from FV aren’t on this chart. Not even, likely, at the end. Here’s the actual tape:

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