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Exchange-Traded Funds

What ETF Managers Do

These funds are typically easier to run than most mutual funds. But they require a kind of precision.

They make it look so easy—partly because it is.


"It's pretty simple, really," Mr. Liao says in the headquarters of New York-based Van Eck Global, the sponsor of Market Vectors ETFs. Mr. Liao never has to pick a stock, and executes trades only under certain circumstances. The primary mission for him and his colleagues is to keep their funds' holdings, and the value of those holdings, precisely in line with the indexes they track.

Such ETFs are easier to manage than index-tracking mutual funds. A single person or small team can oversee a long list of ETFs, as Mr. Liao and his team do. Indeed, 87% of Van Eck's ETF assets are in the 38 funds run by Mr. Liao and his staff of three portfolio managers and analysts.

Less Trading

ETF managers generally don't buy and sell the underlying securities to meet investor orders, unlike index and actively managed funds. This keeps commissions, expenses and taxes down.

Peter Liao ENLARGE
Peter Liao Market Vectors

Instead, market makers and brokers facilitate ETF trades. For an ETF to work, it requires "authorized participants"—institutions that typically receive ETF shares in exchange for purchasing and handing over a basket of the underlying securities, which are held by a third party for safekeeping. Similarly, authorized participants usually receive a basket of the underlying securities when they redeem their ETF shares. But in general, it is buying and selling by authorized participants, market makers and other traders and investors that helps smooth the market in ETF shares—selling ETF shares when their price is at a premium to that of the underlying stocks, and buying them back if there's a discount.

Mr. Liao and his team have to stay current on market rules and activity in many countries. In Brazil, India and Indonesia, for example, when a change in an index occurs or there is demand for new ETF shares, the team can be required to buy or sell the local stocks involved on behalf of the authorized participant. One day recently, Mr. Liao was busy placing share purchase orders with a few brokers in India as part of creating $4.6 million in new shares of the Market Vectors India Small Cap ETF. SCIF 0.88 %

Time to Think

Far more trading is required around the end of each calendar quarter since that is typically when there are lots of changes in the composition of the stock indexes and other benchmarks that the ETFs track. "Both positive and negative tracking difference are bad," says Mr. Liao, who on days with less action might be found at his desk evaluating what effects pending dividends or mergers might have on companies in his funds, or exploring ideas for new ETFs.


Mr. Liao left his native Taiwan as a teenager to attend high school in the U.S. and graduated from New York University in 2004 with a joint major in math and economics.

After college, Mr. Liao joined Van Eck Global as an assistant to company principal Jan F. van Eck, and after little more than a year he became a manager for the company's first foray into ETFs: the now $9.2 billion Market Vectors Gold Miners GDX -3.54 % ETF, often referred to by its ticker symbol, GDX.

"Peter had shown an ability to quickly analyze complicated commodity futures indexes," says Mr. van Eck. "The ETF job requires a high degree of precision."


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