ETF Trading: Trade Large Blocks of ETFs Efficiently
Discover the benefits of using an institutional block desk when you have a large ETF trade.
The Value of Using a Block Desk for Large ETF Trades
There are several important criteria to consider when trading ETFs, such as the use of limit orders, market volatility, the time of day to trade or if the underlying markets are closed and liquidity of the ETF. These considerations help advisors execute trades for their clients in the best manner possible. Commonly, most advisors look at the on-screen liquidity, which is gauged by its average daily volume (ADV). The on-screen or secondary market liquidity is only one source of liquidity for an ETF and only shows what has been traded, not what could have been traded, of the ETF. It is important to note that an ETF has multiple layers of liquidity that trading or institutional block desks can source to complete orders.¹ Institutional block desks can be used not only for large ETF trades but also for any size ETF trade that, in general, is over 5% of the ADV of the ETF.
The additional layers of liquidity may help advisors achieve efficient execution and pricing for their ETF trades. To help you better understand the depth of the market for ETFs, the graphic below highlights three levels of liquidity:
ETF Trades Can Be Executed Efficiently
Below are some examples of scenarios where the on-screen liquidity was not as deep and a trading or block desk helped execute these trades efficiently. These are block trades that were executed in domestic equity, international equity and fixed-income ETFs. The trades had minimal to no impact on the bid/ask spread, resulting in the investor having efficient execution.
Figure 1 shows a trade in American Century Quality Preferred ETF (QPFF), a domestic equity ETF. At the time this trade was executed, QPFF had a 30-day ADV and was 19,856 shares, which is well below the block trade of 34,804 shares for a total value of $1,207,002. As you can see, the trade was executed at $34.68, just a penny above the ask price, which is still considered an efficient price. So, with the help of the block desk, the buyer was able to capitalize on the other layers of ETF liquidity that were not visible on the secondary market.
Figure 2 shows a similar example within a fixed-income fund, American Century Multisector Income ETF. This trade was for 311,114 shares at $42.04 for a total value of $13,079,232 where the 30-day ADV at the time was 15,719. Again, the block desk was able to capitalize on the underlying liquidity in the market to execute the trade efficiently.
Figure 3 shows a trade for 101,124 shares in another fixed-income ETF, the Avantis Core Fixed Income ETF (AVIG). The 30-day ADV at the time was 53,359 shares. The trade was executed at $41.27 for a total value of $4,173,387. This is evidence that the block desk can access the market depth not seen by the average investor.
Figure 4 is a trade for Avantis U.S. Large Cap Value ETF. The large trade was executed at $47.29 for 99,565 shares and $4,708,428 in total.
These examples show how large ETF trades can achieve quality execution in ETFs with low on-screen liquidity. It is wise to use the tools and resources available to execute sizable trades where you think there is no liquidity. Your ETF trading desk and block desk are the dependable resources to help.
ETF Trading: Common Order Types Used To Trade ETFs
Below are common order types with guidance related to ETF block trades as well as contacts to assist you in executing these types of trades:
Order Types | Description | Price Control? | Guaranteed Execution? | Suitable for Block Trades? |
|---|---|---|---|---|
Market | Buy/sell executed immediately | No | Yes | No |
Not recommended for ETF block trades or even smaller ETF trades given no price control. Guaranteed execution and speed of execution are the main benefits of Market orders.
Limit | Buy/sell executed at pre-determined price | Yes | No | Yes |
Recommended for both block trades and smaller ETF trades given full price control. A buy order will only go off at the trigger price or lower, and a sell order will only go off at the trigger price or higher.
Held | Buy/sell executed immediately | No | Yes | No |
A Held order is the same as a market order and is also not recommended for ETF trades.
Market Not-Held* | Order goes to a floor broker or an institutional trade desk, who has both time and price discretion for execution. This usually involves getting a block desk involved | Partial | Yes | Yes |
Recommended for large ETF trades, as the broker assesses the market to achieve efficient execution and generally request quotes from more than one ETF liquidity provider to execute at the best price
Limit Not-Held* | Order goes to a floor broker, who has time and price discretion for execution, combined with a pre-defined lower limit on sells and upper limit on buys | Partial | No | No |
Similar to market not-held orders with added price control from the limit order price protection. Also recommended for large ETF trades, with the slight risk of not being executed if the only offers from the liquidity providers are outside of the limits given to the floor broker.
Stop | Pre-determined price set; once market is at or breaks through it becomes a market order | Partial | No | No |
Not recommended for large ETF trades because the order becomes a market order once the trigger price is met, putting you at risk of market moves.
Stop Limit | Pre-determined price set, once market is at or breaks through it becomes a limit order | Partial | No | Yes |
Recommended for large ETF trades, as it is similar to a stop order except it becomes a limit order after the trigger price is met, providing full price control.
*Most advisor platforms have institutional desk available to assist in trading securities
Contact Experts To Help You Execute Large ETF Trades
Institutional Block Deck
Advisors who that are on institutional platforms have access to institutional block desks for ETF orders. These desks provide trade guidance, execution expertise and advice on trading strategies.
The contact information for institutional block trading desks can be found on the platform’s website or through the platform’s advisory help center.
Broker/Dealer ETF Trade Desk
Advisors or institutional investors who are not on an institutional platform or do not have access to an institutional block desk should contact their broker/dealer ETF trade desk. The sales representative at the broker/dealer should be able to direct investors to the relevant ETF trade desk.
ETF Issuer's Capital Markets Desk
If you would like to discuss the execution for a trade and receive guidance from individuals at the issuer’s capital markets desk directly, you can always reach out to them.
If you have questions around trade execution, please refer to the tools provided above or contact the American Century Investments Capital Markets Desk through your American Century or Avantis Investors representative.
Most advisor platforms have an institutional desk available to assist in trading securities.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
You should consider a fund's investment objectives, risks, and charges and expenses carefully before you invest. The fund's prospectus or summary prospectus, which can be obtained at AmericanCenturyETFs.com, contains this and other information about the fund, and should be read carefully before investing.
You should consider the fund's investment objectives, risks, and charges and expenses carefully before you invest. The fund's prospectus or summary prospectus, which can be obtained by visiting avantisinvestors.com or calling 1-833-928-2684, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
AVIG, AVLV, MUSI, QPFF:
This fund is an actively managed ETF that does not seek to replicate the performance of a specified index. To determine whether to buy or sell a security, the portfolio managers consider, among other things, various fund requirements and standards, along with economic conditions, alternative investments, interest rates and various credit metrics. If the portfolio manager considerations are inaccurate or misapplied, the fund's performance may suffer.
QPFF:
Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities may receive preferential treatment compared to common stock regarding dividends, but they are typically subordinated to a company's other debt which subjects them to greater credit risk. Generally, holders of preferred securities have no voting rights. A company issuing preferred securities may defer dividend payments on the securities and may redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities and may have less upside potential than common stock.
Floating rate securities are structured so that the security's coupon rate or the interest paid on a bond fluctuates based upon a reference rate. In a falling interest rate environment, the coupon on floating rate securities will generally decline, causing a reduction in the fund's income. A floating rate security's coupon rate resets periodically according to the terms of the security. In a rising interest rate environment, floating rate securities with coupon rates that reset infrequently may lag behind the changes in market interest rates. Floating rate securities may also contain terms that impose a maximum coupon rate the company issuing the security will pay, therefore decreasing the value of the security.
Concentrating investments in a particular industry or group of industries gives the fund greater exposure than other funds to market, economic and other factors affecting that industry or group of industries. The financials sector can be significantly affected by changes in interest rates, government regulation, the rate of defaults on corporate, consumer and government debt, and the availability and cost of capital.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
QPFF is classified as nondiversified. Because it is nondiversified, it may hold large positions in a small number of securities. To the extent it maintains such positions, a price change in any one of those securities may have a greater impact on the fund’s share price than if it were diversified.
MUSI:
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.
The lower-rated securities in which the fund invests are subject to greater default and liquidity risk, because the issuers of high-yield securities are more sensitive to real or perceived economic changes.
AVIG, MUSI:
Derivatives may be more sensitive to changes in market conditions and may amplify risks.
AVIG:
Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.
Lower-rated securities in which the fund invests are subject to greater credit risk, default risk and liquidity risk. If the portfolio managers’ considerations are inaccurate or misapplied, the fund’s performance may suffer.
Exchange Traded Funds (ETFs): Foreside Fund Services, LLC - Distributor, not affiliated with American Century Investment Services, Inc.