A financial professional recently commented to me that although they were interested in the Natixis Seeyond International Minimum Volatility (MVIN) ETF strategy, they were concerned about investing in the product because of its low trading volume. In my experience, this is the most common misconception about ETF liquidity1.

Indeed, MVIN has a 20-day average trading volume of 1,000 shares on the secondary market. However, an investor could buy up to 3 million shares ($140 million) in a single trading day. How?

Where’s the liquidity?
ETF liquidity is based on the trading volume of all the underlying holdings in the portfolio (see image below). Based on the daily trading volume of the current holdings and weights of MVIN from 02/16/2018, market makers are able to facilitate new buy orders up to 3 million shares ($140 million) at the current market quote plus creation costs with little to no impact on the individual underlying holdings.

BLO37 0218 Blog Clearing up the Misconception Chart L4

Executing a trade
This means, for example, a 100,000 share order could be fully executed at the market quote plus creation costs even though only 1,000 shares are being displayed at the offer. To help maintain price control, trades can be entered as limit orders.2 Advisors can consult with their colleagues who specialize in capital markets, or work with their firm’s trading desk directly, for larger orders over $1 million.

Demand, not supply
In summary, the ETF secondary market activity can be viewed as the demand for a product – but not the supply – because ETF shares can be continuously created from the underlying portfolio. This is unlike a normal stock, which has a finite number of shares outstanding. Stock liquidity and ETF liquidity should not be viewed with the same lens.

 


1 The ability to convert an asset into cash quickly, with minimal impact on the price received.

2 A limit order is a direction given to a broker to buy or sell a security or commodity at a specified price or better.

3 Bid price: the price that a dealer or other prospective buyer is prepared to pay for securities or other assets

4 Ask price: the lowest price a prospective seller is willing to accept

RISKS: Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETFs, unlike typical exchange-traded funds, do not attempt to track or replicate an idex. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than U.S. securities, due to varying degrees of regulation and limited liquidity. Currency exchange rates between the U.S. dollar and foreign currencies may cause the value of the fund’s investments to decline. Liquidity risk is the risk that the Fund may be unable to find a buyer for its investments when it seeks to sell them or to receive the price it expects. Decreases in the number of financial institutions willing to make markets in the Fund’s investments or in their capacity or willingness to transact may increase the Fund’s exposure to this risk

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. Visit im.natixis.com/ETFs for a prospectus or a summary prospectus containing this and other information. Read it carefully.

Seeyond is operated in the U.S through Ostrum Asset Management U.S., LLC

ALPS Distributors, Inc. is the distributor for the Natixis Seeyond International Minimum Volatility ETF. Natixis Distribution, L.P. is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, L.P.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

The portfolio is actively managed and characteristics are subject to change. References to specific securities or industries should not be considered a recommendation.

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