Tips for Transacting in Small ETFs

At the end of January, globally listed exchange traded products – primarily exchange traded funds (ETFs) and exchange traded notes (ETNs) – topped $8 trillion in combined assets under management for the first time on the back of nearly $83.1 billion of inflows in the first month of 2021.

Those factoids are being mentioned because those points further underscore the notion that financial professionals, including advisors and wealth managers, are increasingly warm to deploying ETFs within client portfolios.

Translation: ETFs are vital to advisors' toolboxes and that situation isn't going to abate with time. It's going to increase for multiple reasons. I won't address all of those reasons here, but a couple prominent ones immediately come to mind. First, clients are more savvy than ever when it comes to fees. Second, in many cases, ETFs are the preferred instruments not only for broad-based equity market exposure, but for nuanced exposures, such as sustainable and thematic, as well.

Point is advisors are likely to be transacting in ETFs more and more over time, meaning the finer points of ETF trading are taking on increasing importance.

ETF Trading Education Matters

Advisors with client rosters heavy on high-net worth individuals may have large allocations to some popular, highly liquid ETFs. In those cases, the advisor is probably transacting in thousands of shares increments and can use block orders.

However, not all client portfolios are alike and not all ETFs fit the bill as “heavily trade,” meaning there will be times when advisors are buying or selling just a few hundred shares at a time. Smaller trades don't mean “easier” trades and there are avenues for advisors looking to effectively navigate this scenario, including using limit orders on electronic trades.

“If you are concerned about having to watch the order, set the limit 2–3 cents above the offer price. The order will be filled at the best bid or offer, potentially better than the limit price, but the order type guarantees that the price will not go beyond the limit set,” says Michael Barrer, WisdomTree head of capital markets.

Another idea is working with an issuer's capital markets desk, which is a viable option for a variety of trade sizes. For example, if an advisor needs to purchase thousands of shares of the WisdomTree U.S. Quality Dividend Growth Fund (DGRW) – itself a highly liquid ETF – to be spread across multiple client portfolios, she can call that issuer's capital markets team prior to the trade to ensure best exeuction.

Capital markets desks can speak with market makers before you trade and let them know to expect increased electronic volume. This practice should add further liquidity depth to accommodate the expected trades that day,” notes Barrer.

Remember the Basics

Many advisors still fit into one of two segments, neither of which is a negative. There's the group that's been in the business for awhile but is still relatively new to ETFs. Then there's the segment that's new to the industry.

Both groups benefit from remembering/learning some  of the basics of ETF trading, namely do NOT use market orders.

It doesn't happen all the time, but even some of the most heavily traded ETFs, think the SPDR S&P 500 ETF (NYSEARCA:SPY) and the Invesco QQQ (NASDAQ:QQQ), are subject to executed trades (market orders) that are unattractive relative to the funds' net asset value.

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