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.
Exchange traded funds (ETFs) are known for their tradability. With $7.9 trillion in secondary market notional volume in 2021 — 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 2021,2 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 35% of all notional trading volume of US-listed ETFs in 2021.3 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 for the entire range of SPDR ETFs.
Figure 1: 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 Implementation Team can help you evaluate different execution strategies with the goal of optimizing investment objectives and TCO. The SPDR team can help assess:
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?
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?
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.
Market Impact Sensitivity
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.
Trade executed y 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.
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.
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 $14.4M in secondary notional value over the last 20 days, as of February 1, 2022.4
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 20-day average daily aggregate volume of KOMP’s underlying securities was $207B.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 (Figure 2) shows the impact volatility had on KOMP’s bid/ask spread.
Figure 2: Trading KOMP Amid Volatility
Secondary Market Block Trades:
We can see in the chart below (Figure 3) 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 December 20, 2021, a client sold approximately $36M of KOMP. At the time that the trade took place, the market was 56.57/56.66. For reference, the VIX Index was trading 23.41 at the time of the trade.
The client received 0.018% price improvement versus the national best bid/offer (NBBO) on the trade, $0.01 better than the prevailing market bid
This trade accounted for 160% of the fund’s trading volume on the day and was 4 times the fund’s Q4 2021 average value traded
Figure 3: KOMP: Secondary Market Block Trades
Figure 4: KOMP: Secondary Market Information
KOMP Standard Performance Information as of March 31, 2022
Inception Date: October 22, 2018. Index noted is the S&P Kensho New Economies Composite Index. Performance quoted represents past performance, which is no guarantee of future results. 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
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.
1Bloomberg Finance, L.P., as of December 31, 2021. 2Bloomberg Finance, L.P., as of December 31, 2021. 3Bloomberg Finance, L.P., as of December 31, 2021. 4Bloomberg Finance, L.P., as of February 1, 2022. 5Bloomberg Finance, L.P., as of February 1, 2022.
Liquidity The ability to quickly buy or sell an investment in the market without impacting its price. Trading volume is a primary determinant of liquidity.
Total Cost of Ownership (TCO) The purchase price of an asset plus the costs of operation.
The views expressed in this material are the views of Colin Ireland through the period ended April 27, 2022 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 no guarantee of future results.
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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.
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.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
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Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
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