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The SPDR S&P 500 ETF Trust (Ticker: SPY), the most liquid ETF based on Average Daily Value Traded (ADV),1,2 has averaged $43B in notional average value traded per day during the first seven months of 2022 — that represents more than 88% of all S&P 500 ETF trading.3 SPY’s higher secondary volume is driven by a diverse ecosystem of users, as evidenced by the fact that SPY accounts for 92% of all S&P 500 ETF notional short interest and 99% of all S&P 500 ETF options open interest as of August 1, 2022.4
We are often asked the question — how does SPY’s higher trading volume distinguish it from other S&P 500 ETFs? Secondary market trading is an essential layer of ETF liquidity [Figure 1]. And, SPY’s secondary market depth enables a wider range of execution strategy options and offers implicit transaction cost benefits across those execution strategies.
Figure 1: ETF Trading Ecosystem
Source: SPDR SEI team. The information contained above is for illustrative purposes only.
Compared to SPY, the YTD average bid-ask spread of competitor S&P 500 ETFs5 is two times SPY’s bid-ask spread, with higher relative volatility.6 These differences in competitor products — wider spreads and higher relative volatility — tend to be more pronounced in times of market stress. A pre-trade cost estimate analysis comparing SPY execution costs with those of SPY’s two largest competitor ETFs illustrates this [Figure 2].7
Using the SPDR ETF pre-trade tool powered by Virtu, we estimated execution costs for a $25M notional order using a Volume-Weighted Average Price (VWAP) electronic trading strategy over 30 minutes (12-12:30pm). SPY’s two largest competitors exhibit significantly higher estimated market impact costs, as the order size represents a higher percentage of trading over the cost analysis period.
As a point of reference, the expected execution cost to trade the underlying S&P 500 constituents using the same pre-trade parameters was 1.97 bps, making SPY the only S&P 500 ETF to show price improvement relative to the basket in the below analysis.
Figure 2: SPY Execution Costs Lower than S&P 500 ETF Competitors8
|Costs in Basis Points (bps)||SPY||iShares Core S&P 500 ETF||Vanguard 500 Index Fund ETF|
|+Spread Cost from NBBO-mid||0.10||0.17||0.17|
|+Market Impact Cost||0.38||4.94||5.81|
Source: SPDR Execution Team, Virtu/ITG, Bloomberg as of August 1, 2022, VWAP 12:00-12:30pm
The funds presented herein have different investment objectives, costs and expenses. Each fund is managed by a different investment firm, and the performance of each fund will necessarily depend on the ability of their respective managers to select portfolio investments. These differences, among others, may result in significant disparity in the funds' portfolio assets and performance. For further information on the funds, please review their respective prospectuses.
For larger order sizes or those of higher urgency, investors may want to consider a risk, or “block” trade. Offering immediate execution at a single price, with a risk trade the liquidity provider takes on the risk of managing their resulting position. Because liquidity providers will often compete for the trade, by aggregating multiple quotes across liquidity providers, risk trading allows for a clear measure of best price execution.
Comparing all S&P 500 ETF block trades in 2022 over $10M notional relative to total traded value through end of day July 31, 2022 shows that blocks for all other S&P 500 ETFs represent a significantly higher percentage of total traded value than does SPY. This is likely due to limitations on secondary trading for some S&P 500 ETFs, as well as the depth of the broader S&P 500 ecosystem supporting competitive pricing for risk trades.
In addition to providing tighter spreads and lower market impact costs for retail investors executing electronically on the secondary market, SPY’s depth of liquidity across market makers means institutional-sized orders can be executed as a risk trade with minimal market impact. SPY’s overall robust liquidity profile provides cost benefits relative to its competitors, regardless of execution strategy implemented.
Figure 3: SPY Offers More Execution Options, Same Quality Execution
|Blocks over $10M||Total Traded Value||Blocks as % of Total Trading|
|Competitor S&P 500 ETFs9||$22,814,318,659||$831,950,938,000||2.74%|
Source: SPDR Execution Strategy Team; Virtu/ITG as of August 1, 2022. All reported block trades for S&P 500 ETFs from January 3, 2022 – July 31, 2022 over $10M notionally. Excludes Auction and After-market Trades.
Risk-market pricing has historically been competitive for S&P 500 ETFs, given the depth of the S&P 500 ecosystem. But how does pricing change in different volatility regimes? Through the first seven months of 2022, the CBOE Volatility Index (VIX) mean was about 26.10 Using this level as a threshold, during periods of higher-than-average volatility, block trade history demonstrates a significant increase in cost relative to NBBO-mid.
Figure 4: Average Cost Impact from NBBO-mid
|Product||VIX at/below 26||VIX above 26|
|All Other S&P 500 ETFs||1.63 bps||4.01 bps|
Source: SPDR Execution Strategy Team; Virtu/ITG as of August 1, 2022. All reported block trades for S&P 500 ETFs from January 3, 2022 - July 31, 2022 over $10M notionally. Excludes Auction and After-market Trades. Data includes 774 observations totalling $19.2B notionally for SPY and 747 observations totalling $22.8B notionally for two largest competitor S&P 500 ETFs combined.
Looking at transaction costs for various trading execution strategies across all S&P 500 ETFs over $200B AUM, we see that SPY, as a result of its higher trading volume, can potentially deliver transaction cost benefits above other S&P 500 ETFs.5 And these benefits may be more pronounced during periods of market stress. As a result, traders seeking a high degree of implementation flexibility — and a cost-efficient tool for navigating different market environments, including volatile regimes like the current one — may want to look more closely at SPY.
1 Bloomberg Finance, L.P., as of August 1, 2022
2 SPY AUM vs. competitor S&P 500 ETFs, according to the Average Daily Value Traded (ADV) between January 3, 2022 and August 1, 2022
3 Bloomberg Finance, L.P., as of August 1, 2022
4 Bloomberg Finance, L.P., as of July 15, 2022 (data published twice a month)
5 S&P 500 ETFs over $200B in AUM
6 Bloomberg Finance, L.P., as of August 1, 2022
7 SPDR Execution Strategy Team; Virtu/ITG as of August 1, 2022. All reported block trades for S&P 500 ETFs from January 3, 2022 – July 31, 2022 over $10M notionally. Excludes Auction and After-market Trades. Data includes 774 observations totalling $19.2B notionally for SPY and 747 observations totalling $22.8B notionally for two largest competitor S&P 500 ETFs combined .
8 No representation or warranty is being made to the currency, accuracy, reliability, or completeness of the information nor liability for any decisions made based upon it. Past performance is not indicative of future results. Any index information or performance is meant to not meant to represent any specific fund. You cannot invest directly in an index. Additional information on the funds discussed, including standard performance and the prospectus, are available at:
9 S&P 500 ETFs over $200B in AUM
10 Bloomberg Finance, L.P., as of August 1, 2022
Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.
The difference between the highest price a buyer is willing to pay for an asset and the lowest price the seller will accept to sell. Bid-ask spreads are a key measure of the liquidity of an asset or security.
CBOE Volatility Index® (VIX®)
A measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
The minimum lump quantity of exchange-traded fund shares that are typically created by authorized participants out of underlying securities that make up the ETF. Creation units can vary in size; with most containing between 25,000 and 300,000 ETF shares each. The use of creation units in ETF design is crucial because they allow for the representation of the underlying assets — the ETF shares, which represent a tiny chunk of a creation share — to be traded intraday. The ability to trade ETFs on an exchange gives them advantages over other investment vehicles, such as mutual funds.
The ability to quickly buy or sell an investment in the market without impacting its price. Trading volume is a primary determinant of liquidity.
The market in which ETF shares or common shares of public companies that currently exist are traded on exchanges between investors.
Total Cost of Ownership (TCO)
The purchase price of an asset plus the costs of operation.
The tendency of a market index or security to jump around in price. Volatility is typically expressed as the annualized standard deviation of returns. In modern portfolio theory, securities with higher volatility are generally seen as riskier due to higher potential losses.
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