This blog 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.
One of the main benefits of the exchange-traded fund (ETF) structure is intraday liquidity. Whether an investor is trading 100 shares in their brokerage account or millions of shares on behalf of an institution, accessing liquidity and obtaining fair execution typically have no bearing on if buying or selling an ETF. An ETF is at least as liquid as its underlying basket, regardless of average daily volume (ADV). Moreover, ETF liquidity providers are in the business of facilitating trade activity to all market participants. That being said, I still hear investors who are skeptical about being able to easily exit their position when it comes time to sell. The notion that liquidity favors buyers over sellers is simply not correct. Two similar trades in the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) provide a great example.
In figure 1, we see a large block trade on the buy side of approximately 3.18 million shares on October 28, 2014.
Figure 1
From an execution standpoint, the client was able to buy approx. $82 million worth of USDU, one penny inside the offer, on a spread that was .08 cents wide. The 30-day ADV at the time of the trade was just over 11,000 shares.