ETF TRADING: BEHIND THE SCENES

Transcription

1 ETF TRADING: BEHIND THE SCENES Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency and involve investment risks, including the possible loss of the principal amount invested.. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has not been filed with FINRA, may not be reproduced and may not be shown to, quoted to or used with retail investors. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY OppenheimerFunds Distributor, Inc. All rights reserved. Not for Use with Retail Investors

2 CONTENTS I. Understanding Liquidity II. Trading Best Practices III. Q&A 2

3 I UNDERSTANDING LIQUIDITY

4 LIQUIDITY DRIVEN BY MORE THAN VOLUME 91% of ETFs trade less then 1mm shares per day 81% of ETFs trade less then 200k shares per day 74% of ETFs trade less then 100k shares per day Source: Bloomberg June 2017

5 VOLUME CAN BE MISLEADING Average AUM for ETFs that trade between 100k-200k shares per day is $1.1B Average AUM for ETFs that trade between 50k-100k shares per day is $536M RWL ADV*: 62,584 AUM: $682M * ADV is Average Daily Volume Source: Bloomberg June 2017

6 ETFS NOW BEING USED MORE FOR INVESTING RATHER THAN TRADING ADV 12/31/15 1/28/16 2/24/16 3/21/16 4/15/16 5/11/16 6/07/16 7/01/16 7/28/16 8/23/16 9/19/16 10/13/16 11/08/16 12/05/16 12/30/16 1/27/17 2/23/17 3/21/17 4/17/17 5/11/17 6/07/17 Inflows have already surpassed $200B YTD (2016: $287B). Yet ETF volumes are down by 20%. $2,000,000,000 $1,800,000, Day Rolling ETF ADV and Total ETF AUM 3,200,000,000,000 3,000,000,000,000 2,800,000,000,000 $1,600,000,000 2,600,000,000,000 $1,400,000,000 2,400,000,000,000 2,200,000,000,000 AUM $1,200,000,000 2,000,000,000,000 1,800,000,000,000 $1,000,000,000 1,600,000,000,000 $800,000,000 1,400,000,000,000 AUM ADV (20 Day Avg Dollar Volume) Source: FactSet; past performance not indicative of future results

7 LOOK TO LIQUIDITY OF UNDERLYING SECURITIES Average daily volume (ADV) alone is insufficient when determining the liquidity of an ETF since market makers can access the underlying securities to facilitate trading. The liquidity of the underlying basket of securities is highly relevant in determining the liquidity of an ETF. Source: Bloomberg 2016

8 Underlying Securities ETF TRUST THE PROCESS BEHIND THE SCENES Market participants will ensure that the liquidity exists in the ETF market by accessing the underlying securities to maintain the equilibrium of supply and demand. Buyers Sellers Liquidity Providers Broker Dealers Authorized Participants Market Makers Underlying Securities Creation & Redemption Activity ETF Shares

9 GAIN PEACE OF MIND THROUGH IMPLIED LIQUIDITY Implied liquidity is a daily representation of how many shares of an ETF can be created by accessing the underlying securities. A market maker could create an additional 108.4M shares with a notional value of approximately $2.9B before reaching 25% of any of its underlying securities 30 day average daily volume (ADV).

10 LIQUIDITY EXAMPLE #1

11 LIQUIDITY EXAMPLE #2 June 7, 2016 RDIV volume reached over 484k shares, a 4,600% increase from the prior day. RDIV was +1.10% versus +1.13% for its index. Despite the substantial volume increase, no effect on the ETF performance relative to its index. *Buy order of 253,219 shares executed at the ask of $31.21

12 LIQUIDITY EXAMPLE #2 CONTINUED By working with a market maker, the shareholder was able to execute several large block orders with no impact. Buy order of 253,219 shares executed at the ask of $31.21 Buy order of 180,086 shares executed inside the offer

13 II TRADING BEST PRACTICES

14 KEY POINTS TO CONSIDER WHEN TRADING ETFS Know the INAV Understand the bid/ask spread Realize the importance of order types Avoid trading at the market open and close

15 KNOW THE INAV The Intraday NAV or INAV is similar to the NAV calculation used for both ETFs and mutual funds, but offers a real-time calculation of the ETF based on current prices of the underlying securities. The INAV is calculated and disseminated every 15 seconds. While useful for US domestic products, INAVs can be stale for international products, whose components are closed during U.S. trading hours.

16 UNDERSTAND THE BID/ASK SPREAD While a shareholder would ideally buy/sell at the INAV, there are costs built into trading by market makers and passed on to the shareholder. The following costs create the Bid/Ask spread for the ETF: Creation and Redemption Fee Execution Costs Ticket Charges, Underlying Bid/Ask Spread, Taxes (International Constituents) Cost of Carry Cost to hedge Spreads can widen due to lack of pricing information when the underlying securities markets are closed or illiquid.

17 REALIZE THE IMPORTANCE OF ORDER TYPES Friends don t let friends use market orders: Market Orders

18 REALIZE THE IMPORTANCE OF ORDER TYPES The use of market orders (filled at the best available price), are generally not advisable for the majority of ETFs because they can blow through the posted liquidity of an order book, which are typically layered with tighter spreads at the top and widening spreads below. Limit orders can protect an investor when trading ETFs by ensuring that buys or sells are executed at specified prices (or better). Hypothetical ETF: XYZ Hypothetical Market Order: 2,000 shares BID ASK 100 $ $ $ $ $ $ $ $ $19.80 Widening Spreads 400 $ $ $20.20

19 AVOID TRADING AT MARKET OPEN OR CLOSE 15 minutes Give it 15 minutes on the open. Though the market opens at 9:30am EST, individual securities open at varying times. To account for the lack of price transparency this may cause, market makers tend to widen their spreads around the open..and on the close: ETFs rely on market makers to keep their prices at or near fair value and market makers depend on reliable hedges to manage risk, which are less prevalent at the close. Slight dislocations between NAV and closing prices can occur as a result.

20 III Q&A

21 DISCLOSURES These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are subject to change based on subsequent developments. Alternative weighting approaches (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by visiting oppenheimerfunds.com or calling Investors should read prospectuses and summary prospectuses carefully before investing.. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has not been filed with FINRA, may not be reproduced and may not be shown to, quoted to or used with retail investors. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY OppenheimerFunds Distributor, Inc. All rights reserved. DM