The ETF Liquidity Pool
Secondary market accounts for a limited portion of an ETF’s overall liquidity
|On screen orders typically traded directly in the market or through algorithms
|Liquidity Providers (LPs) can make markets OTC
ETF Market Makers
|Authorized Participants (APs) can also create or redeem shares directly with the ETF sponsor
How ETFs Work: Creation/Redemption
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.
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.
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.
Liquidity of Underlying Basket
What goes into iNAV and Fair Value estimates?
- Total transaction costs vary by asset class and location
- Foreign transaction taxes and currency conversions directly increase trading costs
- Impacts on domestic and non-domestic trading costs are displayed in the example below:
Total Cost of Ownership
Expense ratio is not the only ETF cost component.
Transaction costs represent a significant cost consideration for ETF users.
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Arbitrage: the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
SPY: The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index. The Trust seeks to achieve its investment objective by holding a portfolio of the common stocks that are included in the index (the “Portfolio”), with the weight of each stock in the Portfolio substantially corresponding to the weight of such stock in the index.
VOO: The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
IVV: The investment seeks to track the investment results of the S&P 500 (the “underlying index”), which measures the performance of the large-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
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