When looking at the behind the scenes action that makes ETFs work, investors should understand how they interact with the primary markets through the creation and redemption process to create new ETF shares. Lewis explained that the ETF creation and redemption process occurs when an investor enters an order to buy or sell a large number of ETFs shares and there are not enough shares available on the secondary market. Due to the innate creation and redemption process, ETFs are able to create and redeem shares based on supply and demand through the help of Authorized Participants whom work with ETF issuers and market participants to help provide more efficient or seamless ETF trades by providing the necessary ETF shares in case there are not enough on the secondary market.
Tidbits ETF Investors Should Keep In Mind
Beyond understanding the innate creation and redemption process that helps provide a clearer sense of an ETF’s liquidity, Lewis also outlined a number of other tidbits that ETF investors should keep in mind. For instance, investors should look at using limit orders when buying and selling ETFs; consider avoiding stop orders; use stop limit orders instead; avoid trading in the first 15 minutes of the market open or last 5 minutes of the trading session; try to trade ETFs with international exposure when those markets are open; leverage an ETF block desk for large orders; and speak with the ETF sponsor before buying or selling large quantities of an ETF.
Sandra Testani, Director of Product Management for Alternatives and ETFs at American Century Investments, argued that investors who are interested in intelligent beta and actively managed strategies designed to solve common investment problems and potentially enhance outcomes may consider something like the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ) and American Century Diversified Corporate Bond ETF (NYSEArca: KORP).
While not actively managed, the STOXX U.S. Quality Value ETF incorporates a smart beta strategy reminiscent of actively managed investments and tries to reflect the performance of the iSTOXX American Century USA Quality Value Index, which is made up of 900 largest publicly traded U.S. equity securities screened and weighted by fundamental measures of quality, value and income. The portfolio is also dynamically allocated based on risk-adjusted return of value and income as a way to respond to changing market conditions.
The Diversified Corporate Bond ETF, though, is actively managed and integrate the insights of American Century Investment’s fundamental investing experts with the research methodologies of their Global Analytics Team. The fund invests in U.S. dollar-denominated corporate debt securities issued by U.S. and foreign entities, but may hold securities issued by supranational entities. Additionally, up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements.
Financial advisors who are interested in learning more about trading ETFs can watch the webcast here on demand.