Insights

Optimizing Trade Execution for ETFs of All Levels of Liquidity

The liquidity of the SPDR® S&P 500® (SPY) sets the benchmark of implementation flexibility for a wide array of trading strategies. Trading less liquid ETFs efficiently often requires more attention to the details.

January 18, 2023

Colin J Ireland, CFA

Sales Execution and Institutional Strategy

Bradley E Kotler

Fixed Income ETF Sales and Analytics

Antonio Avila

Exchange traded funds (ETFs) are known for their tradability. With $9.7 trillion in secondary market notional volume in 2022 — more than the next five most actively traded ETFs combined — the robust liquidity of the SPDR S&P 500 (SPY) sets the benchmark of implementation flexibility for a wide array of trading strategies.¹ Yet with 87% of all US-listed ETFs trading less than $25M per day, on average over 2022,² we’re mindful that trading the vast majority of less liquid ETFs efficiently can take a little more attention. We’re here to help.

As a liquidity leader, SPDR ETFs accounted for 34.3% of all notional trading volume of US-listed ETFs in 2022.³ The SPDR Sales Execution and Institutional Strategy Team is a dedicated group of capital markets professionals focused on providing resources to help assess ETF liquidity and evaluate different execution strategies for the entire range of SPDR ETFs.

Many ETF Solutions, But Not Many with Scale

Determining Execution Objectives — One Size Does Not Fit All

As the number of ETFs in the marketplace has grown, investors have increasingly dedicated resources to evaluating ETF liquidity as a key component of their total cost of ownership (TCO). For all SPDR ETFs, our Sales Execution and Institutional Strategy Team can help you evaluate different execution strategies with the goal of optimizing investment objectives and TCO. The SPDR team can help assess:

Execution priorities

What is the timeframe for execution?
Is the creation/redemption window open?
Based on trade objectives, which is the correct type of order to use?

Trade considerations

Is the trade of a social size, or is it outsized in comparison with the ETF’s historical average volumes?
What is the trade size relative to the underlying market?
Are the underlying constituents open to trade due to local market hours or holidays?

Market environment

Is the market trading in an orderly fashion (i.e., volatility halts)?
Is the ADV drastically higher/lower than normal?
Is the ETF’s bid/ask wider than usual?
Is there currently an outsized premium/discount?

Match Execution Strategies with Portfolio Objectives

ETF secondary trading volume is often the first measure of ETF liquidity. However, investors with larger order sizes can source liquidity not displayed on the screen from liquidity providers. ETFs are at least as liquid as their underlying constituents at any given point in time. With ETFs representing a multitude of asset classes, geographies, sectors, and styles, the SPDR team is available to navigate different market environments and volatility regimes to properly evaluate execution strategies and meet your objectives.

Execution Strategy	Description	High Urgency	Market Impact Sensitivity	Time Risk	Anonymity
Risk Trade	Client received price for the entire trade at once, and the liquidity provider takes on the risk of managing the result 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.	Yes
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.		Yes	Yes
Worked Order	Electronic order types using automated preprogramed 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.		Yes	Yes	Yes

Trading the SPDR® S&P Kensho New Economies Composite ETF (KOMP)

The SPDR S&P Kensho New Economies Composite ETF (KOMP) seeks to track the S&P Kensho New Economies Composite Index, which pursues the potential of a new economy fueled by innovative companies disrupting traditional industries by leveraging advancements in exponential processing power, artificial intelligence, robotics, and automation. The fund averaged roughly $7.6M in secondary notional value over the last 30 days, as of January 6, 2023.⁴

Investors seeking to trade orders of $15M–30M would represent a significant portion of the secondary volume but may consider trading the ETF on risk with a liquidity provider.

Let’s walk through execution considerations:

Execution Priority Trade Strategies: Can be developed to best align with the client’s execution priorities including cost, immediacy of trade, and anonymity.
Trade Considerations: The order size represents a large percentage of KOMP’s secondary trading volume, but a small percentage of the underlying basket volumes. The 30-day average daily aggregate volume of KOMP’s underlying securities was $129B.⁵
Market Environment: Is there news or are there macro-related headlines that may impact market volatility or cause uncertainty for liquidity providers? The chart below shows the impact volatility had on KOMP’s bid/ask spread.

Trading KOMP Amid Volatility

Secondary Market Block Trades:

We can see in the chart below that risk trades in the $10M–40M range have occurred in KOMP as investors have sourced liquidity from providers. Each example should be evaluated independently, as time of day and market environment can impact relative pricing. However, these block trades should serve as helpful historical examples of risk trades executed during different market environments.

On May 23, 2022, a client bought approximately $28M of KOMP. At the time that the trade took place, the market was 43.40/43.47. For reference, the VIX Index was priced 28.48 at the time of the trade.

The client received an execution price equal to the national best bid/offer (NBBO) on the trade, implying no market impact.
This trade was 3.9 times the fund’s Q2 2022 average value traded.

KOMP: Secondary Market Block Trades

Date	Time	Size (shares)	Value ($M)	Trade Price	Bid	Ask	Impact %	Impact $	VIX Index
2022-05-23	14:52:51	634,488	$27,581,193	43.47	43.40	43.47	0.00%	$-	28.5
2022-01-24	14:01:37	471,446	$23,888,169	50.67	50.48	50.61	0.12%	$0.06	29.9
2022-06-07	10:29:09	522,765	$23,791,035	45.51	45.47	45.56	-0.09%	$(0.04)	24.0
2022-01-25	13:57:41	456,862	$23,135,492	50.64	50.54	50.61	0.06%	$0.03	31.2
2022-12-15	13:35:32	447,271	$18,096,585	40.46	40.45	40.48	-0.02%	$(0.01)	22.8

Source: Virtu/ITG, as of January 6, 2023.

KOMP: Secondary Market Information

Timeframe	5 Day	30 Day	Year-to-Date
Spreads ($)	0.06	0.06	0.07
Spreads (%)	0.14%	0.15%	0.15%
Volume ($)	6,334,428	7,582,626	7,193,648
Volume (Shares)	162,590	186,518	156,849
Performance (%)	2.10%	-4.60%	-32.21%
Fund Flows ($)	27,900	(47,734,600)	193,046,800
Secondary-Primary Ratio	5:1	2.6:1	3:1
Average Premium/Discount (%)	0.14%	0.15%	0.15%

Source: Bloomberg Finance, L.P., as of January 6, 2023. Past performance is not a reliable indicator of future performance.

KOMP Standard Performance Information as of December 31, 2022

	1 Month (%)	QTD (%)	YTD (%)	1 Year (%)	3 Years (%)	5 Years (%)	10 Years (%)	Since Inception (%)
NAV	-6.90%	2.55%	-32.17%	-32.17%	4.23%	-	-	7.78%
Market Value	-6.92%	2.44%	-32.23%	-32.23%	4.20%	-	-	7.76%
Index	-6.94%	2.49%	-32.38%	-32.38%	4.03%	6.71%	-	7.70%

Inception Date: October 22, 2018. Index noted is the S&P Kensho New Economies Composite Index. Gross Expense Ratio is 0.20%. Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit ssga.com for most recent month-end performance. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index. Index funds are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.

Rely on the Expertise of the Liquidity Leader

With decades of trading experience and a wide variety of pre-trade liquidity analytics tools, the SPDR Sales Execution and Institutional Strategy Team is dedicated to working closely with clients to evaluate ETF liquidity and provide product and trading support.

Footnotes

Glossary

Disclosures

The views expressed in this material are the views of Colin Ireland through the period ended January 6, 2023 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Past performance is not a reliable indicator of future performance.

All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.

The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.

Investing involves risk including the risk of loss of principal.

Diversification does not ensure a profit or guarantee against loss.

KENSHO® is a registered service mark of Kensho Technologies Inc. (“Kensho”), and all Kensho financial indices in the Kensho New Economies® family and such indices’ corresponding service marks have been licensed by the Licensee in connection with the SPDR Kensho Intelligent Structures ETF, SPDR Kensho Smart Mobility ETF, SPDR Kensho Future Security ETF, SPDR Kensho Clean Power ETF, SPDR Kensho Final Frontiers ETF and SPDR Kensho New Economies Composite ETF (collectively, the “SPDR ETFs”). The SPDR ETFs are not marketed, sold, or sponsored by Kensho, Kensho’s affiliates, or Kensho’s third party licensors.

Kensho is not an investment adviser or broker-dealer and Kensho makes no representation regarding the advisability of investing in any investment fund, other investment vehicle, security or other financial product regardless of whether or not it is based on, derived from, or included as a constituent of any Kensho New Economies© family index. Kensho bears no responsibility or liability for any business decision, input, recommendation, or action taken based on Kensho indices or any products based on, derived from, or included as a constituent of any such index. All referenced names and trademarks are the property of their respective owners.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

There can be no assurance that a liquid market will be maintained for ETF shares.

In general ETFs can be expected to move up or down in value with the value of the applicable index. Although ETF shares may be bought and sold on the exchange through any brokerage account, ETF shares are not individually redeemable from the Fund. Investors may acquire ETFs and tender them for redemption through the Fund in Creation Unit Aggregations only. Please see the prospectus for more details.

Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

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