# HXS no longer a C$ hedged ETF



## cainvest (May 1, 2013)

So I was going through the list of commission free ETFs and see HXS, as of April 1st 2013, is no longer CDN $ hedged. Their news release states they changed it due to the marketplace wanting non-hedged, nice to see they are responding.

Of course the iTrade commission free ETF listing is lagging by still showing it as a hedged fund.


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## GoldStone (Mar 6, 2011)

Commission free ETFs tend to be thinly traded, even in good times. There is a reason why they give them away for free.

If you want to follow a timing model, stick to the most liquid ETFs out there. When the going gets tough, liquidity disappears.


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## andrewf (Mar 1, 2010)

When the going get's tough, it's probably already too late to sell.

I don't think there would be any liquidity issues with the ETF in the event of a general market panic. It's collateralized by liquid securities.


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## GoldStone (Mar 6, 2011)

andrewf said:


> When the going get's tough, it's probably already too late to sell.


Andrew, you are missing the context. cainvest and I were talking about specific timing model based on long SMAs:

http://canadianmoneyforum.com/showt...ctive-Investing-Role-Did-it-help-you?p=181525

When the model sends a sell signal, by very definition of the model it's not too late to sell.



andrewf said:


> I don't think there would be any liquidity issues with the ETF in the event of a general market panic. It's collateralized by liquid securities.


The spreads on illiquid ETFs will get very wide in the event of a market panic. The bid will drop well below NAV. If you have a large position to liquidate, you will likely move the price further down.

In theory, all ETFs should trade very close to NAV at all times. In practice, this is not always true. Thinly traded ETFs deviate from NAV more often than you think. I've seen a recent paper with the data (I'm too lazy to hunt for the link).

If you are a true Buy&Hold investor, ETF liquidity is not a concern. If you want to follow a timing model, you have to take these things into consideration.


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## cainvest (May 1, 2013)

Is this article not true then?
http://www.benzinga.com/analyst-ratings/analyst-color/12/07/2740931/etf-liquidity-thinly-traded-etfs-are-not-so-bad


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## andrewf (Mar 1, 2010)

ETF liquidity is not a function of volume or AUM, though. You can't judge a book by its cover in this case.

I'm quite familiar with Faber's work. My point is that sell signals of that sort usually come before market panics, at which point liquidity ought not to be a concern.


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## cainvest (May 1, 2013)

andrewf said:


> I'm quite familiar with Faber's work. My point is that sell signals of that sort usually come before market panics, at which point liquidity ought not to be a concern.


And that is correct for this timing model, you've got a fair bit of time to get out.


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## eulogy (Oct 29, 2011)

As a buy/holder and have a long (decades) of accumulation to do, liquidity doesn't mean much. If you have that choice to go after VTI or even VOO it would be a better choice than HXS. Though I'm working out some imbalances in my allocation and I'm considering HXS purely for it not paying the dividend.


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## GoldStone (Mar 6, 2011)

andrewf said:


> ETF liquidity is not a function of volume or AUM, though.


Sure. You can sell any ETF at any time. The question is: at what price? When everyone wants to get out, the price of a thinly-traded ETF drops below NAV. The discount to NAV can be as high as 2%.

Here's an example.

PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (NYSEDN)
http://www.invescopowershares.com/products/overview.aspx?ticker=PDN

The ETF invests in international small-caps selected based on the fundamental factors. If you want to own international small-cap value, this is one the few options available.

Average daily trading volume: 9.6K shares

Premium/Discount to NAV
http://www.invescopowershares.com/products/overview.aspx?ticker=PDN#freqdist

Take a look at the quarter ended 6/30/2012. PDN dropped 16% from mid-March to June 1st.

35 days it traded 100-199 Basis Points below NAV.
3 days it traded more than 200 Basis Points below NAV.


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## andrewf (Mar 1, 2010)

Liquidity in this case refers to spreads or deviations from NAV. Spreads are not necessarily wide on small or thinly traded ETFs, nor do they necessarily trade far from NAV.

That international small/mid-cap ETF is on the illiquid side because the underlying securities are illiquid, making arbitrage by AP costlier. Small companies are generally less liquid than big ones, and international stocks often don't trade in the same hours as ETFs on NYSE, which can make pricing the underlying assets tricky. You see the same thing even in big EAFE funds. A 'best practice' is to trade those in the morning while European markets are open.


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## cainvest (May 1, 2013)

So basically put, if the underlying stocks have liquidity so does the ETF, regardless of the ETFs volume. Correct?


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## andrewf (Mar 1, 2010)

In general, yes. It really requires investigation. I hold some smaller ETFs and have had no trouble trading them at NAV. Just use limit orders. Always, always use limit orders.


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