Editor's Note: This article comes fromBlockVC（ID：blockvcfund）, reprinted by Odaily with authorization.
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Editor's Note: This article comes from
, reprinted by Odaily with authorization.
1. The global ETF management scale is growing rapidly, reaching nearly 6 trillion US dollars in 2019, doubling in size in four years; asset management giants BlackRock (iShares), Vanguard, and State Street all use ETFs as their main asset management products;
2. As the main force of ETF products, passive ETFs aim at index tracking and have the characteristics of dispersing risks and stable returns; active ETFs add active investment strategies on the basis of passive ETFs to enhance the index and obtain excess returns. Target, compared with common mutual funds and private equity products, its investment cost is lower and its transaction liquidity is higher;
3. Due to the high correlation of investment targets in the digital currency industry, it is difficult to obtain excess returns through passive investment methods, and it is difficult for small and medium-sized investors to obtain quantitative products of active investment. Therefore, we use the management methods and operating modes of active ETFs in the traditional financial market to try ETFs for quantitative asset management products in the digital currency market, so as to reduce the investment threshold for investors in quantitative products and improve the liquidity of digital currency asset management products.
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1. Overview of ETFs in traditional financial markets
ETF (Exchanged Traded Fund) is an open traded index fund, which is a fund that tracks changes in the "underlying index" and can be listed and traded on the stock exchange. ETFs can be purchased or redeemed from fund companies, and can be traded from the secondary market, which has the characteristics of both closed-end funds and open-end funds.
At present, the vast majority of ETFs issued in China adopt a passive management method, which is fitted according to a specific index, and the composition of investment portfolio and positions is relatively fixed. The exchange adopts the method of publishing IOPV (Indicative Optimized Portfolio Value) every 15 seconds to reflect the changes in the fund's net value brought about by the rise and fall of the index in a timely manner. There is a temporary discount or premium between the net worth indicator and the transaction price in the secondary market, but the values of the two are basically the same.
In addition to passive ETF products, there are also actively managed ETF products. This type of product does not simply simulate the index, but uses quantitative means to select stocks and trade at the right time to obtain returns that exceed the benchmark index. The product lines of public index/quantitative direction are sorted according to the initiative of the investment strategy as follows: Index ETF, Smart Beta ETF, Common Index/LOF/Classification, Index Enhancement, Quantitative Long and Quantitative Hedging. From left to right, the initiative increases, the strategic flexibility increases, and the disclosure mechanism and frequency change accordingly. Among them, Smart Beta mainly selects stocks based on certain specific factors to obtain excess returns of a certain factor, while the enhanced index adopts a multi-factor stock selection strategy with tracking error constraints. The main purpose is to outperform the tracking index while obtaining stable excess returns. income.
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Figure 1 Source of public offering product lines: Founder Securities
It is worth mentioning here that LOF (Listed Open-Ended Fund) is a listed open-end fund. This type of fund is basically similar to ETF in nature. It can be purchased and redeemed in the OTC market, and can also be traded on exchanges. . However, the two products, LOF and ETF, differ in terms of operating procedures and management models:
In terms of investment strategies, most of ETF's investment strategies are index-type passive management funds, while LOF investment strategies include both index funds and active management funds;
In terms of the redemption mechanism, ETF redemption exchanges fund shares and "basket" stocks in the fund composition, while LOF uses cash to exchange fund shares;
In terms of net worth disclosure, ETF adopts the method of publishing IOPV every 15 seconds, while LOF adopts the method of publishing daily, and its strategy and position transparency are lower than that of ETF.
Thanks to the recovery of the overall stock market, China's ETFs exploded in 2019. During the year, 90 new ETFs were established, a year-on-year increase of 240%, and 254 new applications were registered, a year-on-year increase of 450%. The overall size of ETFs reached 598.1 billion, a year-on-year increase of 59%. The transaction activity in the secondary market is gradually increasing, and the asset allocation behavior using ETF as an investment method is increasing year by year.
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Figure 3 The ratio of ETF on-market transactions to stock market turnover in 2019 Source: Zhongtai Securities
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Figure 4 ETF performance in 2019 Source: Zhongtai Securities
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Figure 5 US ETF scale and world share Source: Zhongtai Securities
At the same time, according to statistics from MorningStar, at the end of 2018, the investment scale of passive tracking indexes such as stock index mutual funds and ETFs in the US stock market accounted for 48.7%, and this data is expected to exceed 50% by the end of 2019. Managed investment has become the mainstream of the market.
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At the level of fund managers, iShares, Vanguard, and State Sreet account for 80% of the U.S. ETF market share, of which BlackRock's iShares ranks first with a market share of 39%. The top three in China are China Asset Management, E Fund, and Southern Asset Management. The three companies account for 40% of the total market, and the overall market concentration is lower than that of the US ETF market. For the subdivision of index targets, the types of ETFs in China and the United States are mainly broad-based ETFs, followed by industry ETFs. for broad.
1.3 Actively Managed ETFs
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Figure 7 Scale of actively managed ETFs Source: ETFGI
Active ETFs developed rapidly in the following ten years. According to the statistics of Bloomberg on October 31, 2019, the number of active ETFs in the world has reached 657, accounting for about 10% of the total number of ETFs. 2%.
Figure 8 Active ETF Size Distribution Source: Bloomberg
According to the types of assets invested by ETFs, fixed-income products accounted for the highest proportion, accounting for 73.6% of the overall scale. The reason why the proportion of equity products is relatively small is because ETF itself requires high-frequency announcement of holdings, which makes equity strategies easy to be leaked and imitated, and issuers tend to avoid equity-type active ETFs.
In order to avoid the leakage of fund strategies, active ETFs have formulated different disclosure specifications and operating methods according to different product types. The following is a comparison of the disclosure methods of mutual funds and several active ETF products:
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Figure 9 Transparency comparison of US ETF products Source: Everbright Securities
1. Mutual funds other than ETFs do not have the trading characteristics of the secondary market, and can only be exchanged through cash subscription and redemption in the primary market. The net value is announced daily and the holdings are announced quarterly;
2. Transparent active ETFs, represented by ARK series technology active ETFs and Vanguard series active factor ETFs, are subscribed and redeemed through authorized participants (AP, Authorized Participants), and the net value and positions of the day are announced daily;
4. Semi-transparent active ETF, represented by Blue Tractor Group’s semi-transparent ETF product, AP uses a computer-generated PCF list with 90% weight overlap with the actual investment portfolio to apply for redemption, and estimates the IOPV daily based on the published positions;
5. NextShares, represented by Eaton Vance's ETMF, has a model similar to LOF, which publishes net value daily and position details quarterly. However, intraday trading will not be executed immediately, but will be traded based on the net value + discount or premium disclosed after the market closes.
After understanding the definition and overview of ETFs and LOFs, as well as the operating mode of active ETFs, the next topic we will focus on is the feasibility of ETFs in the digital currency market and the ETFization of quantitative asset management products in the digital currency industry.
2. ETF application in digital currency market
2.1 Feasibility demonstration of passive ETF and active ETF in the digital currency market
There are two main purposes of investing in passive ETF products. One is to invest in a certain target or target combination conveniently and quickly as a trading tool. For example, if an investor believes that gold is expected to rise in the future, he can directly buy a gold ETF without directly buying physical gold or opening a commodity futures account to go long on gold; similarly, an investor who is bearish on the Nasdaq but lacks financing means can Do it by buying an ETF (SQQQ) that is three times short the Nasdaq index. In this context, ETF is a tool designed by fund companies to help investors improve investment convenience.
Figure 10 FTX platform triples BTC (BULL) token source: FTX
This kind of product also exists in the digital currency market, mainly represented by leveraged tokens (BULL/BEAR) on the FTX platform. This type of product exists in the form of ERC-20 tokens, but it is essentially an index tracking ETF. The platform manages it as a market maker and fund issuer, and can be traded in the secondary market and purchased and redeemed. Convert ERC-20 tokens to USD. The value anchoring mechanism and holdings of the tokens are announced on the website, and can be claimed and redeemed directly through the platform. What needs to be explained here is that volatility products (MOVE) and style tokens (SHIT, DRGN, EXCH) are not ETF-type products but index contracts set by the platform, which are beyond the scope of this article.
Another purpose of investing in passive ETFs is to avoid unsystematic risks and reduce volatility by building a diversified portfolio. Investing in individual stocks or targets of a single variety will have non-systematic risk exposures. By constructing a "basket" of stocks, multiple investment targets with low correlation coefficients of yields are combined to find an efficient frontier to obtain Beta returns. .
Figure 11 The reduction effect of investment portfolio on unsystematic risk Source: BlockVC Research
For the digital currency market, many exchanges and asset management companies have also carried out product design and attempts of "digital currency ETF" or "ETT" and "ETP". The main representatives are HB10 launched by Huobi, OK06 launched by OKEX and BVC16 launched by BlockVC. The former two products can be purchased and redeemed through the exchange, and traded on the secondary market. The compilation logic of the two is also basically the same, mainly adopting a passive tracking strategy. Among them, HB10 selects the top 10 currencies as components based on the average daily trading volume of the currency in the previous quarter, and then calculates the index price according to the weighted trading volume to track. OK06 selects the top five currencies by current market value plus OKB as components, and calculates the index price based on the weighted average of the circulating market value. The composition is relatively fixed and can basically reflect the trend of mainstream currencies.
Compared with the former two, the BVC16 index adopts a more proactive investment model, selects three types of indicators, and represents the overall market trend. Growth Token accounts for 20%. Back-tested according to liquidity and correlation standards, a total of 16 currencies were screened out, positions were adjusted and publicized every month, and weight ratios were calculated based on market value and volatility.
Figure 12 Comparison of historical data of BVC16 with OK06 and HB10 Source: BlockVC
From the data in the above figure, it can be found that the absolute return of the BVC16 index with active management factors is significantly higher than that of OK06 and HB10, while the volatility Z-Score and daily volatility ATR are lower.
The main reason is that the mainstream currencies with the highest market capitalization or trading volume in the digital currency market have extremely high correlation coefficients, and the properties of investment portfolios based on major currencies are basically similar, and index ETFs cannot be realized. The effect of risk sharing, while the index tracking strategy has caused the passiveness of the investment strategy, making it difficult to outperform the so-called Beta value in most people's minds, that is, the value of BTC in the digital currency market. Therefore, the introduction of an active management investment model and a fund model that combines active management + passive management is more in line with the investment characteristics of the digital currency market.
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2.2 ETFization of quantitative asset management products in the digital currency market
Combining the market characteristics and strategic characteristics of the digital currency market, we can operate ETFs through LOF+Activeshares:
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Figure 14 How U.S. ETFs Work Source: ETF.COM
image description First of all, in the purchase and redemption process, a method similar to LOF is adopted for cash purchase or redemption (BTC is used for the currency standard, and USDT is used for the USDT standard); the main purpose is that the quantitative strategy is highly timing-sensitive, and the composition of positions changes rapidly, so it cannot Adopt a "basket" of currencies for redemption;
The participants in subscription and redemption are authorized participants AP, mainly referring to institutional investors, who act as liquidity providers, and perform subscription operations when the fund is at a premium, and perform redemption operations when the fund is at a discount, so as to ensure that the price of the ETF is at Stability in the secondary market; ETF investors can conduct transactions in the primary market by purchasing and redeeming from authorized participants, or by trading in the secondary market;
