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.


Sales Execution and Institutional Strategy
Fixed Income ETF Sales and Analytics

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

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.


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