ETF Liquidity In Action With This Treasury Bond Fund (GOVT)

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April 12, 2012 5:58pm NYSE:GOVT

Noel Archard: If you know me, you know I love a good liquidity story. Watching the tape a few weeks ago, I saw what I think is a great example of liquidity in one of our newer funds and the ETF creation/redemption process in action.

Some investors tell us that seeing trading volume is important to feel comfortable buying a newly launched ETF. Understandably, they want to make sure that they’ll be able to get in and out of the fund when they want (and at the price they want).

But this recent example affirms once again that what investors see in the secondary markets isn’t the full story.

In March, we saw a very large trade in one of our newer funds, the iShares Barclays US Treasury Bond Fund (NYSEARCA:GOVT). GOVT offers access to the entire 1-30 year Treasury curve in a single trade. That particular day, an investor bought 11 million shares of GOVT ($270 million dollars worth) in one trade.

Two things are impressive (and instructive) about this trade:

  • First, the trade was executed in a single block with zero market impact. The trade was executed 6 cents below the last offer. That means that the investor was able to place a very large trade without incurring significant transaction costs or altering the fund’s market price.
  • Second, GOVT grew by 58x in a single instant. I know that looks like a typo, but it’s not. The fund was able to absorb an exponential influx of assets without a hitch. This goes back to the magic of creation/redemption – the ETF can grow and shrink because large institutional investors can “create” new shares of the fund according to demand. (For more on how that’s possible, check out this video.)

What does that mean for you? When it comes to ETFs remember that liquidity isn’t limited by what you see on the screen. Rather ETF liquidity is a function of the liquidity of underlying securities. If the underlying market is liquid, like the Treasury market in the example above, the ETF can adjust to meet demand.

For investors who have large sized trades to execute, like in the case of the GOVT example the ETF sponsor should be able to connect them with the market participants who can provide this type of best execution.

It might be an old story, but it’s one that I never get tired of telling. Whether it’s 10,000 shares or 1 million shares or 11 million shares, the number of shares of an ETF can be increased or decreased to match current demand.

Shares of ETFs may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Written By Noel Archard From The iShares Blog

Noel Archard, CFA is a Managing Director and Head of Product for   North America iShares. He currently heads the iShares product function   in the US, which is responsible for product research and development,   product management, the management of iShares in capital markets and   product services and analytics. Noel joined iShares in 2006, then part   of Barclays Global Investors (BGI), which merged with BlackRock in   December 2009. He spent over 10 years at The Vanguard Group, first   working with their brokerage service unit and then moving into their Exchange Traded Funds group.

Noel has a BS degree from Northwestern University and is a Chartered Financial Analyst charterholder (CFA). He is a member of the Financial Analysts of Philadelphia and the CFA Institute, and holds Series 7,  24,  63 and 65 securities licenses.

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