Imagine a world where you can have any exchange traded fund (ETF) you want. A world in which trading volume, assets under management and a wide bid/ask spread no longer are feared. Thanks to ETF providers and a growing industry of what are known as “alternate liquidity providers,” it can happen.
Advisors, institutions and retail investors have had certain long-held notions about ETFs and what determines liquidity that simply no longer hold true.
When you’re dealing in volume, buying and selling an ETF isn’t just a matter of finding a fund with all the qualities you desire – billions in assets, heavy trading volume, strong performance, low cost – and clicking “buy.” Attributes such as trading volume and assets used to be major considerations for investors because it tended to be that low activity in a fund led to wide spreads, bigger costs and, in a worst-case scenario, no one to buy the fund you’re holding when you’re in the market to sell it.
A Wider ETF Universe
The existence of people who facilitate the process of trading ETFs by providing a market for even the most thinly-traded fund is opening up new worlds for advisors and investors, making it possible for them to invest in ETFs that they once feared would be illiquid. [The 4 big benefits of ETFs.]
While what they do isn’t new – they’ve been around more or less as long as ETFs have –but there weren’t as many as there are now. And just like ETFs have made it possible for investors to access futures, currencies and far-flung global markets that previously were only open to institutions, alternate liquidity providers have expanded beyond institutional clients to registered investment advisors (RIA) and financial advisors. The services of liquidity providers give these advisors better access to price discovery and execution.
David Abner, director of institutional ETF sales and trading at WisdomTree, is one such person. After helping Bear Stearns build up their ETF trading business and making markets for institutional clients, he moved over to WisdomTree in 2008. The mission: help educate clients on how to trade ETFs from an issuer standpoint. The position at WisdomTree was created in response to a sharp uptick in ETF interest on the part of RIAs.
“What’s happening is that the client base is actually changing. ETFs are being picked up by registered investment advisors in droves, and these guys are primarily mutual fund investors,” Abner says. Abner is author of the forthcoming book, The ETF Handbook, which is scheduled to launch in March.
More Access for Advisors
Advisors may not have the same access to an institutional ETF desk, something WisdomTree found to be a growing issue. The job of Abner’s team is to hand-hold advisors through the process of the execution of a trade, although ETF providers don’t do any execution themselves.
“Advisors are starting to use ETFs and trading them in big sizes, not just little pieces.” This can lead to confusion – if advisors don’t know the volume or the spread on a fund, then two key pieces of information they need to trade large blocks are missing.
Abner defines large blocks of shares as anything above 5,000-10,000 shares. “It’s valuable to understand how to trade that kind of size in an ETF,” Abner says. “Because ETFs have this additional liquidity beyond the displayed trading volumes and you need to get people to access that liquidity for you.”
WallachBeth is an agency broker-dealer that sources liquidity by linking up institutional clients with an expansive liquidity network, who compete for the orders that cross their desk. The winner is the corresponding best bid or offer. The company’s ETF desk was formed out of a desire to quell growing advisor fear and misconceptions about certain ETFs.