When most investors check data on liquidity, the steps are relatively straightforward. Check the bid price, the ask price, and the volume being traded. The smaller the spread and the higher the volume, the more liquid the product is. Simple, right? Yes – and no. In the case of a normal stock, the aforementioned is true. However, when considering the same for exchange-traded products (which include ETFs), the indicator has another layer to it.
Prior to exploring the depths of ETP liquidity, let us review a few key terms distinctive to these products:
• Authorized participant (AP) – Usually a large financial institution, like an investment bank that
interacts directly with the ETP issuer.
• Market maker (MM) – Financial institution that has a contract with the exchange to provide
constant bid/offer spreads throughout the day. In many cases, the AP is also the MM.Unlike typical mutual funds and closed-end funds, ETPs have an inherent redemption mechanism, which helps keep the market price in line with its NAV. Like normal stocks, as the ETP price fluctuates throughout the trading day, the AP can step in and do one of the following:
a. If the market price > NAV, the AP can buy the constituent stocks and simultaneously
exchange them for ETP shares, which can then be sold to investors.
b. In the opposite scenario, where NAV > market price, the AP can purchase ETP securities and
exchange them for the constituent securities, which it will then sell on the market to make a riskless profit.
Low volume on the actual ETP security does not indicate a lack of liquidity, and the investor is better served by checking the average daily volume of the stock(s) that constitute the ETP. As most of the underlying assets tracked by ETPs are highly liquid, most can draw tens of millions without having a negative impact on the liquidity of the underlying assets. This is essentially the case even if the ETP has a relatively small amount of assets under management.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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