WisdomTree CAPITAL MARKETS
The WisdomTree Capital Markets team is a is a U.S.-based team with global coverage that functions as the key point of contact for both investors and the trading community for all things trading related to WisdomTree exchange-traded funds (ETFs). The team is responsible for maintaining relationships across the ETF support ecosystem, including market makers, authorized participants and exchanges. Additionally, the group advises institutional investors, RIAs and wealth managers on the most efficient means for implementing their trading strategies as well as helps investors navigate their specific path in the ecosystem to achieve liquidity.
The Fundamentals of ETFs
Since the first exchange-traded funds (ETFs) were launched in the U.S. in 1993, ETFs have opened a new realm of investment opportunities. They have become more popular as time has passed, and their assets have increased dramatically since the mutual fund trading scandals of 2002-2003.
ETF Creation/Redemption Process: Behind the Scenes
As ETFs continue to grow in assets and scope of coverage, we are often asked questions about how they actually work. Our Capital Markets Associate, Paige Corbin, explains the ETF Creation/Redemption process in this snapshot.
NAV Doesn’t Mean Free: ETFs vs. Mutual Funds
by Michael Barrer
ETFs are built on a backbone of transparency, while mutual funds are opaque in nature. And although mutual funds trade at NAV, it doesn’t mean the execution cost is free. Michael Barrer explains.
ETFs: Benefits of Exchange Listing
by Anita Rausch
I have been talking to ETF investors for more than a decade, and when I mention the numerous benefits of the structure, I often hear “I don’t need intraday liquidity, so that does not benefit me.” Well, I am here to tell you that whether or not you utilize intraday liquidity, it benefits all ETF investors.
ETF Execution: Your Choice Matters
by Paige Kyle
No matter where an investor is on the spectrum of sophistication when it comes to using ETFs, what is paramount is to recognize that ETF execution affects their total return. Investors spend the majority of time on asset allocation, but when it comes time to execute, it is imperative to know what resources you have to obtain the best pricing possible.
What Makes ETFs Tax Efficient?
by Paige Kyle
ETFs have many benefits that have caused them to expand in terms of assets and offerings over the past decade. Not only are they typically low cost and extremely transparent, a key characteristic and an attractive feature is their tax efficiency.
Why This ETF Trade Should Be Celebrated
by Anita Rausch
The ETF structure is one of transparency and equality. The trade on September 28, 2016, when more than $139 million of an approximate $157 million Fund was sold in one execution is a perfect example of how investors are protected in the structure and how there is more to an ETF than its AUM and ADV.
Become a Smarter ETF User: Look through the Wrapper
by Anita Rausch
Many investors judge ETFs for investment candidacy based just on their on-screen characteristics of assets under management, average daily volume and bid/ask spread. By doing that, they may be ignoring the majority of ETFs out there and potentially missing out on some helpful investment tools.
August 24 Revisited: What Has Changed?
by Paige Kyle
As we mark the one-year anniversary of August 24, investors may be asking what has been done since that volatile and chaotic day and if it could happen again.
Say Goodbye to an 8/24 Culprit
by Michael Barrer
August 24, 2015 marked an influential day in the marketplace when we awoke to extremely volatile global markets. Although not the cause of the issues on 8/24, many ETFs were affected by a collision between market volatility and market structure. One of the key factors in why market participants had difficulty pricing ETFs during the opening minutes of 8/24 centered on a little-known and antiquated rule by the NYSE, called Rule 48.
Three Myths of Fixed Income ETF Trading
by Michael Barrer
Fixed income ETFs provide the investing world with transparency in an otherwise opaque asset class. However, because of the over-the-counter nature of the fixed income market and the fact that ETFs with fixed income underlying securities were adopted later than their equity-based relatives, there are still myths around the trading and liquidity profiles of these funds.
Fixed Income ETF Liquidity: Can It Be Quantified?
by Paige Kyle
Although it is not obvious to the naked eye, there is ample potential for daily liquidity in fixed income ETFs. The key is knowing how to access it by utilizing your trading desk or the capital markets desks at the various issuers. Fixed Income ETFs allow investors to economically gain access to a range of fixed income strategies that they may not have the resources or tools to invest in on a per-bond basis.
Order Types: Back to the Basics
by Paige Kyle
You may have heard time and time again that exchange-traded funds (ETFs) are bought and sold just like stocks on an exchange. While this is true, it is important to understand the various order types used to execute ETFs.
Understanding ETF Implied Liquidity
by Paige Kyle
The saying “Don’t judge a book by its cover” can be applied to ETFs when discussing trading volume and liquidity. Oftentimes investors will rule out ETFs because they don’t meet a certain average daily volume threshold. This could eliminate from consideration hundreds of ETFs that could potentially be effective and impactful investment vehicles.
What is an authorized participant?
Authorized participants (APs) are one of the major players at the epicenter of the ETF ecosystem. They are typically U.S.-registered broker-dealers or other financial institutions that have executed agreements with various ETF issuers. These agreements give them the right to create or redeem new ETF shares as demand fluctuates and are vital to the ETF structure.
What is the difference between an authorized participant and a market maker?
A market maker provides liquidity and makes markets in ETFs. Most ETFs also have what is called a lead market maker, who is designated by the exchange to provide a measure of liquidity and ensure reasonable spreads and markets. An AP has an agreement with an issuer to create and redeem ETF shares. Not all market makers are APs, but most market makers have access to the infrastructure of an AP. A market maker does not need to be an AP in order to provide competitive markets.
How do I trade an ETF with low average daily volume?
Average daily volume (ADV) does not measure the true liquidity capacity of an ETF. It is a simple measure of on-screen demand, not supply. The true liquidity capacity of an ETF resides in its underlying securities. This liquidity resource can easily be tapped to possibly trade multiples of ADV by utilizing your trading desk resources. This is something that the WisdomTree Capital Markets team can assist with and help guide you to the best resources to facilitate your trade with the best execution.
What is implied liquidity?
ETFs are at least as liquid as their underlying basket of securities. Implied liquidity is a more accurate way to measure the liquidity capacity of an ETF compared with the ADV of the ETF wrapper for equity ETFs. Implied liquidity is calculating how many ETF shares that can be bought or sold in a single day without affecting the underlying securities. ETF implied liquidity first looks at how many shares of each underlying component are in a creation unit. The final output assumes that if transacting in the underlying securities, how many ETF shares would that translate into while being no more than 25% of the 30-day average volume of the least liquid security in the basket. ETF implied liquidity is a conservative measure of what can potentially be traded in ETF terms based on the ETF’s components.
What is an ETF creation? What is an ETF redemption?
The creation/redemption mechanism allows for the increase or decrease of ETF shares based on demand without affecting other investors of the fund. This is an important difference compared with a mutual fund, where any buying or selling in the fund affects all investors. If there is increasing demand for a specific ETF, new shares can be created to meet that demand in exchange for underlying assets; if demand decreases, shares can be reduced by exchanging ETF shares for assets. This flexible process is solely done by an AP. It is important to note that the investor never makes the decision to create or redeem; this is a back-office function determined by the broker.
How do I know what resources I have access to for trading ETFs?
The Capital Markets team at WisdomTree is a key resource for all ETF investors. We maintain relationships with all of the major trading desks, ranging from proprietary trading firms to global banks to a hybrid of the two to platform and custodial desks. We can easily work with you on determining who your resources are and how to best access them, and we can provide an introduction if needed. We are extremely familiar with the various nuances of the platform desks, so we are here to help make sure you receive the best trade execution experience possible.
Is there a minimum trade size to call my trading desk or the Capital Markets team at WisdomTree?
No size is too small! Each ETF will vary depending on its profile, so if you have any concern it is always best to call. The WisdomTree Capital Markets team can also help you determine if you should reach out to your trading desk or if the trade that can be executed electronically. The Capital Markets team and your trading desk are here for you.
What are the benefits of trading a fixed income ETF?
Fixed income ETFs have multiple benefits. They allow investors to easily trade the fixed income asset class on an exchange, which is typically traded over the counter. Fixed income ETFs give clients transparency to their exposure by providing daily fund holdings. This is very different compared with a mutual fund, which discloses holdings only on a quarterly basis with a 90-day lag. Fixed income ETFs also have the benefit of potentially having a tighter bid/ask ETF spread than the underlying bonds. Lastly, investors can potentially access on-exchange liquidity, and no transaction has to occur in the underlying bonds. ETFs provide additional layers of liquidity.
Is there a risk in allocating assets to an ETF that only has a few holders?
It is a common misconception that assets under management (AUM) levels or a smaller number of holders of a fund indicate risk to the fund’s investors. Regardless of the number and size of shareholders in an ETF, the liquidity and capacity for investment, both on the way in and on the way out, typically remain the same. AUM and the number of holders simply tells you the level of assets and the number of investors in the fund. It is important to realize that an investment is a piece of the sum of the market capitalization of the underlying securities.
How do ETFs trade differently than stocks?
While ETFs and stocks both trade on a stock exchange, there are some notable differences. Unlike a stock, which is a single security, an ETF is a wrapper made up of a basket of securities. The shares outstanding of an ETF can fluctuate with demand as it has another avenue of liquidity through the underlying basket. A stock has a finite number of shares that can be traded. Additionally, ETFs typically provide a more diverse exposure to a particular sector or country. Stocks provide exposure to one particular company.
What is the difference in pricing definitions?
- NAV represents the value of the fund at their last price of the prior trading day. The ETF will always trade at a premium or discount to the last NAV that was struck the night before. Intra-day Indicative Value is a better measure of ETF Fair-Value on an intra-day basis.
- Intra-day Indicative Value - Represents the ETF price based on the last traded price of the underlying basket. For US markets this price should closely align with the current ETF price. For international ETFs the IV becomes stale once the underlying market has closed for the day as the ETF begins to trade as proxy. That premium or discount from IV is based off of expectations for the next trading day. This fair value of the ETF is calculated by using Futures, the current US markets or other correlated proxy’s. The IV will be similar to the current day NAV that will be struck that evening.
- Last Price - The last traded price across all exchanges.
- Official Closing Price - The official last price of the ETF on the primary listing exchange.
This content 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.
Trading Best Practices
You may have heard time and time again that exchange-traded funds (ETFs) are bought and sold just like stocks on an exchange. While this is true, it is important to understand the various order types used to execute ETFs. The execution portion of an ETF investment is often underemphasized, but it can be costly if not traded correctly. Investors need to be familiar with the basic order types available and with how to access their ETF block desk to ensure best execution. Furthermore, they need to be well-versed in their respective order entry system. Here are some of the basic terms used for ETF trading.
Avoid trading during the first or last 15 minutes of the trading day
This is when trade desks have less transparency and when markets are more volatile.
Place limit orders; do not use market orders
In times of volatility, we advise investors not to use market orders, especially those connected to stop orders.
Know your resources
Utilize your block trading desk, and if you have not worked with them before, understand their process, so you are prepared when it is time to trade. Get to know the capital markets desks at the various issuers, as they can help you navigate your trading processes.
Market versus Limit Orders
Market and limit orders are the two most basic order types available – and the difference between the two is vital.
A market order is an order to buy or sell an ETF at the best available price immediately. There is no price control, and while it typically ensures instant execution, the order may get filled at any available price, which may be far from the current bid offer, especially during times of market volatility.
A limit order is an order to buy or sell an ETF with a restriction on the maximum or minimum price to be paid. A buy limit order can only be executed at the limit price or lower and a sell limit order can only be executed at the limit price or higher. While limit orders are not guaranteed to fully execute, they protect the investor against an unforeseen market move or a momentary lack of deep bids and offers. We always recommend utilizing limit orders in a reasonable range of fair value with the understanding that a limit order does not ensure execution.
Stop-Loss Orders versus Stop-Loss Limit Orders
A stop-loss order is an order to buy or sell an ETF at the market price once the ETF has traded at or through your specified or stop price. Once the stop price is triggered, the order turns into a market order. This order is designed as an automatic trigger to immediately trade if the market breaks through a set price threshold. Stop-loss orders can be very dangerous, especially in times of market volatility, and they were a contributing factor to large price swings on August 24, 2015.1
A stop-loss limit order is an order to buy or sell an ETF at the market price once the ETF has traded at or through a stop price, but with a limit price attached to it. The goal here is to activate a limit order at a specified price. As mentioned above, we always recommend utilizing limits when trading, as it gives the investor price control of his or her orders. Just like limit orders, stop-loss limit orders do no ensure execution.
When trading a large block of an ETF or trading an ETF that has lower volume on exchange, it is important to employ all tools available, especially your block ETF desk. Many investors believe that only large institutions have access to liquidity providers, who can access the underlying liquidity of an ETF, but that is not the case. Firms like Charles Schwab, TD Ameritrade or Fidelity as well as all the wirehouse platforms typically have block desks to utilize as a resource, and these are just a few examples. Almost all custodian and wirehouse broker-dealers have agency block execution desks available as a resource to their clients. While each platform has its own system, it is key to note that the client must select his or her order as not held in order to allow the platform desk to execute on the client’s behalf. An order marked or defaulted to "held" will be sent directly to the market and executed without discretion. The Capital Markets team at WisdomTree is always available to guide institutional investors on best trading practices and help them understand all their trading outlets.
1Please note: The New York Stock Exchange (NYSE) no longer accepts or honors stop-loss orders as of February 26, 2016.