David Abner, head of Europe at WisdomTree, looks at the key tactics for trading ETFs successfully.
6: Utilise liquidity providers for blocks of more than 5,000 shares or 25% of average daily volume (ADV):
• If you are an institutional investor or an adviser, you have access to the ETF liquidity providers for risk markets.
• If you are a client of a large broker-dealer, all broker-dealers have ETF trading desks that are in the business of committing capital for block trades or facilitating NAV-based executions.
• If you are in a wealth management business, you probably would have to direct your intermediary trading desk to get you a risk market either from its LP relationships or from a liquidity aggregator.
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7: Get a sense of how much of an impact in the market your trade might create as compared to other trades of similar or larger size in the past.
• You can work with the capital markets desk at ETF issuers or your brokerage firm to get a transaction cost analysis (TCA) study done on your anticipated trade to determine best methods for executing and expected impact on the markets.
8: Understand when you need to utilise risk capital from traders versus when you can have them trade the basket on your behalf. Having trading desks and liquidity providers utilise the creation and redemption feature (and other functionality) of the ETFs is very important in the efficient execution of ETF order flow. Clients can take advantage of this unique ability to grow and reduce shares outstanding.
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9: Develop a relationship with your execution platform or liquidity provider. An open trusting relationship helps them to understand your goals and helps you to achieve them by navigating a complicated ETF trading landscape.
10: Do not undervalue the true cost of not paying attention to the execution of your ETF positions. Executing efficiently in the ETF markets is critical for the performance of your portfolios and can be easily achieved with a small amount of work.
The 10 keys to trading ETFs is an excerpt from Abner's book The ETF Handbook: How to value and trade exchange-traded funds
