How to Trade and Invest in ETFs

When executing an ETF trade, there are many decisions to make in order to ensure that best execution is achieved. In this section we provide information on how to trade ETFs, choosing the best execution strategy and understanding the various layers of ETF liquidity.


Execution Decision Tree

When executing an ETF trade, there are many decisions to make in order to ensure that best execution is achieved. Below is a summary of execution strategies.

Buying and Selling an ETF: Getting Best Execution

Execution Strategy Description High Urgency Market Impact Sensitivity Time Risk Anonymity
Risk trade Client receives price for the entire trade at once, and the liquidity provider takes on the risk of managing the resulting position. Liquidity providers can be put in competition for the trade, allowing for a clear measure of best execution. Client generally benchmarks vs. the quoted NBBO      
NAV trade Trade executed by buying or selling the underlying basket of securities and subsequently creating/redeeming ETF shares. The client typically receives a price reflective of executions for the underlying basket of securities plus or minus creation/redemption costs. Client generally benchmarks vs. end of day NAV.    
Worked order

Electronic order types using automated, preprogrammed trading instructions. Orders can be measured relative to execution benchmarks based on volume, time or other

metrics. Can be applied to both trading in the secondary market or trading the basket.

 

Liquidity

Liquidity is one of the most important features of ETFs, attracting a diverse group of investors to the vehicle. Measuring an ETF’s liquidity isn’t as simple as checking the average daily trading volume (ADV) and bid/ask spread in the secondary market. Looking only at this ‘on-screen liquidity’ misses some of the most important benefits of the ETF structure, such as the ability to create and redeem shares by tapping into the primary market liquidity of the securities within the ETF. We have created a guide to the various layers of ETF liquidity and how to asses both on-screen and primary market liquidity.

Explore the Liquidity Playbook