ETFs are a fast and furious investment vehicle, not only transparent and updating their data regularly, but also able to be traded intraday. There are all sorts of tools for advisors available when it comes to trading ETFs, the subject of a recent webinar hosted by Avantis Investors’ senior investment director Jeromy Thornton and TD Ameritrade’s senior trader for the institutional block desk, Tom Generazio.
Thornton, on behalf of Avantis, a brand of American Century Investments, opened the conversation by inviting Generazio to describe his role and work at the block desk. Commissions used to be explicit costs, Generazio explained, but trading desks at places like TD Ameritrade can also help advisors deal with implicit trading costs, like market impact, or friction from bid/ask spreads.
“The primary role the desk is to help advisors minimize those costs,” Generazio said. “In that dynamic, the advisor is the portfolio manager and I become the trader… advisors lay orders off onto us electronically, mostly electronically, and then we will go and work that order as agent, meaning we’re on the same side of the trade.”
Advisors should first and foremost think about the size of their order and the time of day to trade, Generazio explained, with the number of shares more important than the total value of the buy, with the size of the order important relative to the ADV. For example, if an ETF trades 50,000 shares a day and an advisor wants to buy 5,000 at the end of the day an hour before close, that order becomes even more impactful and greater than 10%.
Just as important for an advisor, he said, is deciding whether to trade held or not held. Held trades execute as soon as possible, while not held trades allow the trading agent to hold off for a good price.
“So when non-held orders come over to TD when thery’re routed to us, they stop at the block desk and one of us will reach out to the advisor and we start the conversation, we start working the order, we talk about it,” Generazio said.
“If your order is less than a couple of 1000 shares, you’re pretty safe to go market held out the door … anything greater than a couple 1000 shares I would go not held to pause before you fire it off,” he added, noting that advisors looking to buy or sell the same security for more than one customer should try to batch their actions and combine their orders to get one average price and access the market more efficiently.
“Some advisors will spool up 10, 15, 20 market orders and they think they’re small, three, four hundred shares each, but when they send them all out at once it has the same effect as collectively all of them going over a month,” he added.
Turning to timing ETF trades, Generazio advised not trading at the open because the constituent components of a given ETF have their own spreads which often open the day relatively wide before settling into a closer range. That applies to the end of the day, too.
“So if you go to enter an order and you’d like to trade the last 15 minutes of the day and something goes wrong, you leave yourself very little time to make corrective action on what you had done,” he said.
“You have to wait until the next day to take corrective action. So I would stress there’s no need to wait until the end of the day,” he said. “I can’t tell you how many advisors seem to start trading at 15 minutes before the bell and it can be fraught with danger.”
Rounding out the tools for advisors discussed on the webinar was market limit orders, which ask the trading agent to only trade up to a limited price. Generazio shared that he uses market limit orders every day. So an investor who wants to buy an ETF like the Avantis U.S. Equity ETF (AVUS) may want to buy it at $70 and no higher, with a limit order only activating when it hits that price.
For more on the variety of tools for advisors available to trade Avantis ETFs and so many more strategies from American Century Investments, advisors can check out the full webinar recording here.
For more news, information, and strategy, visit the Core Strategies Channel.
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