The recent hiccups around the VanEck Vectors Junior Gold Miners ETF (GDXJ) have highlighted something few people talk about: what index managers actually do. And I think it's genuinely underappreciated.
There's a belief in some circles that managing a fund that tracks an index is like riding a bicycle: Yeah, you need to learn, but once you do, it's just on autopilot.
Nothing could be further from the truth.
In no particular order, here's what goes right every day in a solid ETF shop — which nobody ever sees — and what could go horribly wrong.
It sounds boring — unless you're on the hook for it — but ensuring an ETF meets any of hundreds of potential regulatory requirements, all day, every day, is not as easy as it sounds.
The recent GDXJ stories are an example of a fund getting it right. Yes, the fund was forced to deviate from its index because the size of its positions started bumping up against a 20 percent limit on ownership imposed by Canadian regulations. What was missing from a lot of the coverage is that this was a huge win for good management.
Consider the alternative. If Van Eck had been asleep at the wheel and just let some of its positions cross over the 20 percent threshold, it could have been a disaster. A raft of lawyers would have waded into the fray, filing for exemptions or complying with the rules and making tender offers to thousands if not millions of shareholders.
The fund would almost surely have had to close for creations in the chaos.