This post is relevant to institutional investors interested in trading exchange-traded funds (ETFs) in significant volume. Individual investors do not always have access to liquidity providers to trade ETFs as referenced below.
We answer the same question from clients every day: “It’s always easy to get in, but what if I need to get out?” When fear and volatility spike in the marketplace, investors worry that they will not be able to liquidate their investments. This concern is understandable, but it is also important to recognize that ETFs are just a wrapper for underlying investments.
Our Capital Markets team has spent the last five years working with traders, market makers and liquidity providers across the entire ETF trading universe to make sure they understand how WisdomTree ETFs are structured and managed. As a result, the trading community feels more comfortable trading our products in the marketplace and providing block liquidity directly to our client base via the block ETF market. When our clients need instant liquidity, we provide them access through a network of liquidity providers across the ETF landscape.
For example, on March 3, 2014, a client wanted to unwind 277,375 shares of the WisdomTree Chinese Yuan Strategy Fund CYB (approx. $7,000,000 notional) in one trade. Prior to this trade, the average volume of CYB year-to-date (January 2 – February 28) was approximately 56,000 shares per day, as illustrated in the chart below.
The average daily volume of an ETF can be irrelevant as long as the underlying securities in the ETF have sufficient liquidity. CYB invests in Chinese yuan (CNY) forwards, Chinese yuan in Hong Kong (CNH) forwards and CNH time deposits—all of which are extremely liquid instruments that help CYB achieve its stated exposure. The client’s execution is shown below.