{"id":173804,"date":"2020-07-07T13:15:00","date_gmt":"2020-07-07T17:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/trading-lessons\/etf-liquidity-considerations\/"},"modified":"2023-04-25T20:51:55","modified_gmt":"2023-04-26T00:51:55","slug":"etf-liquidity-considerations","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.com\/campus\/trading-lessons\/etf-liquidity-considerations\/","title":{"rendered":"ETF Liquidity Considerations"},"content":{"rendered":"<h3>The ETF Liquidity Pool<\/h3>\n<p>Secondary market accounts for a limited portion of an ETF\u2019s overall liquidity<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-medium wp-image-1705 lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/01-ETF-Liquidity-Pool-scaled.jpg\" alt=\"\" width=\"960\" height=\"181\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 960px; aspect-ratio: 960\/181;\"><\/p>\n<table border=\"0\" width=\"100%\">\n<tbody>\n<tr>\n<td width=\"33%\">On screen orders typically traded directly in the market  or through algorithms<\/p>\n<h4>Exchanges<\/h4>\n<ul>\n<li>NYSE<\/li>\n<li>BATS<\/li>\n<li>NASDAQ<\/li>\n<\/ul>\n<\/td>\n<td width=\"33%\">Liquidity Providers (LPs) can make markets OTC<\/p>\n<h4>ETF Market Makers<\/h4>\n<ul>\n<li>Susquehanna<\/li>\n<li>Jane Street<\/li>\n<li>Virtu<\/li>\n<li>Citadel<\/li>\n<\/ul>\n<\/td>\n<td width=\"33%\">Authorized Participants (APs) can also create or redeem shares directly with the ETF sponsor<\/p>\n<h4>Authorized Participants<\/h4>\n<ul>\n<li>Goldman Sachs<\/li>\n<li>BAML<\/li>\n<li>CITI<\/li>\n<li>Morgan Stanley<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h3>How ETFs Work: Creation\/Redemption<\/h3>\n<p>ETF shares can trade in the secondary market at a premium or discount to their Net Asset Values, which can create a catalyst for creations or redemptions.<\/p>\n<p><img decoding=\"async\" class=\"twothird wp-image-1706 size-medium aligncenter lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/02-ETF-Creation-Redemption-scaled.jpg\" alt=\"\" width=\"956\" height=\"540\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 956px; aspect-ratio: 956\/540;\"><\/p>\n<p>As the ETF decreases in value relative to the portfolio NAV, arbitrageurs may be incentivized to buy the ETF, sell the underlying securities (for in-kind redemptions) and redeem the ETF shares.<\/p>\n<p>As the ETF increases in value relative to the portfolio NAV, arbitrageurs may be incentivized to sell the ETF, buy the underlying securities (for in-kind creations), and create the ETF shares.<\/p>\n<p>&nbsp;<\/p>\n<h3>Liquidity of Underlying Basket<\/h3>\n<p>What goes into iNAV and Fair Value estimates?<\/p>\n<ul>\n<li>Total transaction costs vary by asset class and location<\/li>\n<li>Foreign transaction taxes and currency conversions directly increase trading costs<\/li>\n<li>Impacts on domestic and non-domestic trading costs are displayed in the example below:<\/li>\n<\/ul>\n<p><img decoding=\"async\" class=\"alignnone size-medium wp-image-1707 lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/03-liquidity-underlying-basket-scaled.jpg\" alt=\"\" width=\"960\" height=\"509\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 960px; aspect-ratio: 960\/509;\"><\/p>\n<p>&nbsp;<\/p>\n<h3>Total Cost of Ownership<\/h3>\n<p>Expense ratio is not the only ETF cost component.<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-medium wp-image-1708 lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/04-etf-expense-ratio-scaled.jpg\" alt=\"\" width=\"960\" height=\"120\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 960px; aspect-ratio: 960\/120;\"><\/p>\n<h4>Hypothetical Example<\/h4>\n<p>Transaction costs represent a significant cost consideration for ETF users.<\/p>\n<p>&nbsp;<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-medium wp-image-1786 lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/05-cost-of-ownership-1.jpg\" alt=\"\" width=\"960\" height=\"477\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 960px; aspect-ratio: 960\/477;\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>This lesson will discuss:<br \/>\n\u2022 The ETF liquidity pool<br \/>\n\u2022 How ETFs Work: Creation\/Redemption<br \/>\n\u2022 Liquidity of Underlying Basket<br \/>\n\u2022 Total Cost of Ownership<\/p>\n","protected":false},"author":1,"featured_media":170538,"parent":0,"comment_status":"open","ping_status":"closed","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[13643],"traders-academy":[13126,13128,13132],"class_list":{"0":"post-173804","1":"trading-lessons","2":"type-trading-lessons","3":"status-publish","4":"has-post-thumbnail","6":"contributors-categories-state-street-global-advisors","7":"traders-academy-intermediate-trading","8":"traders-academy-level","9":"traders-academy-trading-lesson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Archives | Traders&#039; 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