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Optimizing Trade Execution for ETFs of All Levels of Liquidity
Exchange Traded Funds (ETFs) are known for their tradability. With $7.7 trillion in secondary market notional volume in 2020 — more than that of its top 8 competitors 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 86% of all US-listed ETFs trading less than $25M per day, on average,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 38% of all trading volume of US-listed ETFs in 2020.3 The SPDR Sales Execution and Implementation Team is a dedicated group of capital markets professionals focused on providing resources to help assess ETF liquidity and evaluate different execution strategies, even for ETFs that don’t have SPY’s highly liquid profile.
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 Implementation 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.
Trading the SPDR® S&P Kensho New Economies Composite ETF (KOMP)
The SPDR® 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 $23m in secondary notional value over the last 20 days.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 clients 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 20 day average daily aggregate volume of KOMP’s underlying securities was $177B.5
- Market Environment Is there news or are there macro-related headlines that may impact market volatility or cause uncertainty for liquidity providers?
We can see in the chart below (Fig.3) that risk trades in the $15M–30M 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 November 6, 2020, a client bought ~$28M of KOMP. At the time that the trade took place, the market was 47.74/47.81. For reference, the VIX Index traded at 24.86.
- The client was able to efficiently execute the entire block at 47.80, a penny below the current ask at the time
- The trade accounted for 257% of the fund’s trading volume on the day and was 3.6x the fund’s Q4 2020 average value traded
Rely on the expertise of the liquidity leader
The SPDR Sales Execution and Implementation Team builds relationships with SPDR ETF authorized participants, market makers, liquidity providers, execution trading desks/platforms and stock exchanges.
We play an active role in supporting competitive markets and maintaining the SPDR ETF liquidity ecosystem. Given our insight into primary and secondary market activity — as well as our access to a wide variety of pre-trade liquidity analytics tools — our team of sales professionals is dedicated to working closely with our clients to help educate them about the nuances of ETF execution and ultimately support optimizing their TCO and portfolio construction efforts.
1 Bloomberg Finance, L.P., as of December 31, 2020.
2 Bloomberg Finance, L.P., as of December 31, 2020
3 Bloomberg Finance, L.P., as of December 31, 2020.
4 Bloomberg Finance, L.P., as of February 1, 2021.
5 Bloomberg Finance, L.P., as of February 1, 2021.
The views expressed in this material are the views of Colin Ireland through the period ended February 15, 2021 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. Investing involves risk including the risk of loss of principal. Past performance is no guarantee of future results.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. 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.
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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. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
The funds presented herein have different investment objectives, costs and expenses.
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.