Trading Tips for Low Volume ETFs

by: Gregory Skidmore
ETFs with a lower trading volume have faced a few challenges. One is the misconception that their trading volume is representative of their liquidity. A low volume ETF may have a very liquid basket or underlying holdings. Therefore, the best way to execute ETF trades varies by firm size and the size of the trade being executed.

Here is a list of tips based on our firm’s trading experience. Also included are a few suggestions I have received from IndexIQ and WisdomTree as we were building positions into their lower volume ETFs IndexIQ GRES, MNA and WisdomTree DEW, DTD, DWM, DEM, DHS, DTH. Using these strategies should help you improve your execution and build large positions in low volume ETFs.

Small Institutions or Individuals - Order Size 0-10,000 / less than 50% of the Daily Average Volume

  • Don’t trade on the open.
  • Work a small block through 2-3 limit orders within quote depth.
  • Domestic ETFs - Use limit orders to target the ETF Intraday Indicative Value
  • International ETFs - Use limit orders in relation to the market price and bid/ask
Medium Institutions - Order size 10,000 / more than 50% of the Daily Average Volume
  • Work the order through your broker-dealer using a trading algorithm like Time-Weighted Average Price or Volume-Weighted Average Price.
  • Work with your broker-dealer and ask for a risk market from a Liquidity Provider.
  • Contact third-party institutional program, block and/or ETF desks.
  • Do a NAV-based transaction by contacting an Authorized Participant desk to trade the underlying basket and give you the implied ETF execution.

Disclosure: Belray Asset Management is long: GRES, MNA, DEW, DTD, DWM and currently holds no positions in DHS, DTH