Six weeks after the first ETF, a bond fund, moved onto the floor of the New York Stock Exchange (NYSE), it was joined by two equity ETFs and one commodity ETF. Before long, there will be enough ETFs residing there to build a full asset allocation model or play a touch football game outside on Wall Street.
On January 3, Harbor Capital Advisors moved three of its ETFs from the NYSE Arca, which utilizes an electronic trading platform, to the floor of the NYSE. While electronic trading remains in place on the NYSE floor, the additional element of human oversight by a Designated Market Maker (DMM) provides trading support that will likely result in increased liquidity, improved price discovery, and reduced transaction costs for investors.
The ETFs included two actively managed equity funds, the Harbor Dividend Growth Leaders ETF (GDIV) and the Harbor Long-Term Growers ETF (WINN), as well as one index-based commodity ETF, the Harbor All-Weather Inflation Focus ETF (HGER).
“For years, the industry has tried to educate ETF investors to steer clear of the first few minutes of trading, but unfortunately investors still do it and receive poor execution at the open,” explained Steve Cook, head of ETFs at Harbor Capital Advisors to VettaFi. “We have to meet investors where they are and improve the experience.”
The two equity Harbor ETFs have relatively short trading records and typically incur limited volume despite owning highly liquid stocks like Apple and Microsoft. WINN trades on average approximately 75,000 shares daily, while GDIV trades under 20,000.
“We are trying to grow the investor base, but low volume ETFs can face challenges to keep trading spreads tight,” added Cook. A DDM on the floor of the NYSE for these ETFs could certainly help.
Indeed, GDIV and WINN had 30-day median bid-ask spreads of 0.26% and 0.22%. The commodity ETF, HGER, traded even less frequently, with a recent average volume of 6,600 shares and a spread of 0.32%.
Harbor hopes to have similar success as the PIMCO Active Bond ETF (BOND), which was the first ETF to shift to the NYSE floor following its move in mid-November. The NYSE published a piece recapping some of the benefits BOND shareholders incurred. The median daily quoted spread dropped 65% as of mid-December, and the median notional quoted size increased by 80%.
“We have observed tighter bid-ask spreads in BOND since the move to the NYSE floor and with the additional market making support received from our DMM,” explained Tanuj Dora, head of ETF capital markets for PIMCO.
As more asset managers understand how they can possibly improve the investor experience for their under-the-radar ETFs using a DDM, products like BOND, GDIV, HGER, and WINN will have more ETF friends on the NYSE floor to join them on Wall Street for a pick-up game.
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