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 $8.7 trillion in secondary market notional volume in the second quarter of 2023 — 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 89.1% of all US-listed ETFs trading less than $25M per day, on average during Q2 of 2023,2 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 37.2% of all notional trading volume of US-listed ETFs in Q2 of 2023.3 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.
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 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. |
|
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 $4.3M in secondary notional value over the last 30 days, as of June 30, 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 just under $179B.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.
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 |
|---|---|---|---|---|---|---|---|---|---|
| 12/15/2022 | 13:35:32 | 447,271 | $18,096,585 | 40.46 | 40.45 | 40.48 | -0.02 | $(0.01) | 22.8 |
| 11/22/2022 | 10:51:56 | 365,102 | $15,177,290 | 41.57 | 41.57 | 41.64 | 0.00 | $- | 21.3 |
| 10/24/2022 | 15:23:12 | 370,643 | $14,658,931 | 39.55 | 39.49 | 39.53 | 0.05 | $(0.02) | 29.9 |
| 12/15/2022 | 15:07:43 | 257,402 | $10,465,965 | 40.66 | 40.65 | 40.67 | -0.02 | $(0.01) | 22.8 |
| 5/9/2023 | 10:06:35 | 201,296 | $8,170,605 | 40.59 | 40.57 | 40.64 | -0.05 | $(0.02) | 17.7 |
Source: Virtu/ITG, as of June 30, 2023.
KOMP: Secondary Market Information
| Timeframe | 5 Day | 30 Day | Year-to-Date |
|---|---|---|---|
| Spreads ($) | 0.05 | 0.05 | 0.06 |
| Spreads (%) | 0.12 | 0.11 | 0.15 |
| Volume ($) | 3,270,807 | 4,290,410 | 6,108,355 |
| Volume (Shares) | 75,097 | 100,445 | 135,639 |
| Performance (%) | 4.08 | 8.04 | -22.85 |
| Fund Flows ($) | (17,500) | 25,183,000 | 269,245,900 |
| Secondary-Primary Ratio | 5:01 | 2.6:1 | 3:01 |
| Average Premium/Discount (%) | 0.12 | 0.11 | 0.15 |
Source: Bloomberg Finance, L.P., as of June 30, 2023. Past performance is not a reliable indicator of future performance.
KOMP Standard Performance Information as of June 30, 2023
| 1 Month (%) | QTD (%) | YTD (%) | 1 Year (%) | 3 Years (%) | 5 Years (%) | 10 Years (%) | Since Inception (%) | |
|---|---|---|---|---|---|---|---|---|
| NAV | 8.68 | 4.66 | 13.70 | 11.41 | 7.52 | - | - | 9.90 |
| Market Value | 8.67 | 4.73 | 13.74 | 11.37 | 7.56 | - | - | 9.89 |
| Index | 8.68 | 4.59 | 13.51 | 10.97 | 7.27 | 8.50 | - | 9.79 |
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. The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.
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.