Download A Day in the Life of an ETF Portfolio Manager

The following is an excerpt from a chapter in the forthcoming book, Active Index
Investing, edited by Steven Schoenfeld, which is scheduled to be published by
John Wiley and Sons in July, 2004.
A Day in the Life of an ETF Portfolio Manager
By Patrick O’Connor
The time is 11:30 a.m. Pacific Standard time and I watch stock prices dance
across the screen on the Bloomberg quote machine. One is apt to be a little
nervous with a billion-dollar trade on the line. I habitually check to see how smallcap stocks are trading. Today is the last trading day in June, or more precisely,
the day of the Russell Reconstitution. Today is the day that Frank Russell
rebalances its entire family of benchmarks to reflect America’s top 3,000 stocks
by market capitalization. Simply put, today is the busiest trading day of the year
for domestic equity indexers.
In preparation for the event, my team stayed late into the previous night,
creating trade lists and formulating implementation strategies. This is the first
year that iShares Russell funds are going through a significant rebalance trade,
having launched the 12 iShares Russell funds only a year earlier. Investors who
are long iShares are counting on my team to take them through the reconstitution
with minimal capital gains and acceptable tracking relative to the benchmark. In a
more dramatic example, the Russell 2000 growth fund is trading over 40 percent
of the entire fund in a single day!
At 11:55 a.m. I get up from the Bloomberg terminal to see firsthand how
our traders are coping. The last hour of trading is when things can get interesting.
There is universal agitation on the desk.
“The Nasdaq computer is down,” someone says. Down? How can that be?
There are frantic calls to several brokers trying to get color on the situation, and
impact to market on close (MOC) trades. No firm answers are forthcoming, just
more confusion and uncertainty. Calls to the Nasdaq are not picked up.
Bloomberg flashes up that the order routing system for MOC orders will not
function for the close. My heart skips a beat. We have hundreds of millions on
the line with the Nasdaq and it fails? Didn’t we survive the whole Y2K thing? Isn’t
there a tech hotline? Can’t someone just reboot?
As the minutes tick by, I begin to realize that several trade lists are looking
like they won’t trade at all. I scurry back to the portfolio management team that is
huddled around a Bloomberg terminal praying for that one scrolling news line
saying that we are back in business. More minutes pass.
“Nasdaq to reopen!” finally appears on the screen.
A collective cheer bursts forth from everyone in the office. We still have
time with 15 minutes to close. But as quickly as the wind raised us up, it leaves
our sails as quickly. “Nasdaq down again.” The massive order flow once again
crashes the system. It’s beginning to feel like a bad episode of The Twilight
Zone.
We could leave trades unexecuted and trade them on Monday, exposing
our funds to risk that stocks won’t open where they closed—the funds would
mistrack their benchmarks if this happened.
With just minutes to go until the close, Nasdaq comes back online, but not
in time to complete trading. In an unprecedented move, Nasdaq decides to keep
its trading doors open an extra hour to ensure all orders are executed. I have just
been through the portfolio manager’s equivalent of Scotty saving the Enterprise
for Captain Kirk. We executed the trades, survived the Nasdaq meltdown, and
kept pace with our Russell benchmarks.