Some investors may be reluctant to trade exchange traded funds that are thinly trade. However, an ETF’s true measure of liquidity is taken from its underlying components, and investors who are trying to push large block trades can consider alternative liquidity providers to better execute trades.
Asset managers who are thinking about putting their own strategy to work in an ETF wrapper but are wary about liquidity concerns can attend the upcoming ETF Bootcamp conference event that is slated for September 29 and 30 in New York City. [Asset Managers Take a Crash Course in ETF Industry]
Advisors, institutions and retail investors have had certain notions of executing an optimal trade based on the perceived liquidity of a specific ETF. For instance, in regard to issues of liquidity, what has been used to determine a stock’s liquidity can’t be applied to ETFs.
A better interpretation of liquidity in ETFs would be to look at an ETF’s average trading volume and the average daily trading volume of underlying securities. ETF liquidity is based on everything that is inside the index or basket that the ETFs track since the funds are also shareholders of their underlying stock components.
Typically, when advisors see light volume, the area is red-flagged to avoid it. Consequently, a broad swathe of ETF options may be needlessly overlooked by many due to misconstrued concerns.
If you’re an advisor concerned about liquidity in low-volume ETFs, you can look for liquidity providers to facilitate ETF trades by providing a market for even the most thinly traded fund. For instance, alternative liquidity providers like Street One Financial, Wallach Beth, KCG, Susquehanna and Wolverine have ETF trading desks to help large investors.
The providers are opening up new worlds for advisors and investors, making it possible for individuals to invest in ETFs that they once feared would be illiquid and diversify into other areas of the market. The services of liquidity providers give advisors better access to price discovery and execution, without making a large impact on market prices.
In addition to best execution, third-party liquidity providers can help to educate their institutional clients on the unique aspects of new ETFs that come to market. These new relationships can sometimes make the difference between a successful launch and a not so successful launch.
For more information on liquidity and trading ETFs, asset managers can visit the ETF Bootcamp site to register for the conference.