The Value of Using a Block Desk

ETF Trading:

Trade Large Blocks of ETFs Efficiently

The Value of Using a Block Desk for Large ETF Trades

There are several important criteria to consider when trading ETFs, such as the use of limit orders, market volatility, the time of day to trade if the underlying markets are closed and liquidity of the ETF. These considerations help advisors execute trades for their clients in the best manner possible. Commonly, most advisors look at the on-screen liquidity, which is gauged by its average daily volume (ADV). The on-screen or secondary market liquidity is only one source of liquidity for an ETF. It is important to note that an ETF has multiple layers of liquidity, which are beyond the on-screen liquidity that trading or block desks can source to complete orders.*

The additional layers of liquidity may help advisors achieve efficient execution and pricing for large trades. The on-screen liquidity or secondary market ADV only shows liquidity for trades that have already been executed. To help you better understand the depth of the market for ETFs, the graphic below highlights three levels of liquidity:

Three levels of ETF Liquidity.

If you would like to dive deeper into the nuances of the three levels of liquidity, please read our Insights on Tools of the ETF Trade: Understanding ETF Liquidity and Trading, which highlights the layers of liquidity, timing and types of trades you should use when trading ETFs.

Large ETF Trades Can Be Executed Efficiently

Below are some examples of scenarios where the on-screen liquidity was not as deep, and a trading or block desk helped execute these trades efficiently. These are block trades that were executed in domestic equity, international equity and fixed-income ETFs. The trades had minimal to no impact on the bid/ask spread, resulting in efficient execution for the investor. 

Figure 1 shows a trade in American Century Quality Diversified International ETF (QINT), an international equity ETF. At the time this trade was executed, QINT had a 30-day ADV of 11,737 shares, which is well below the block trade of 196,269 shares for a total value of $10,017,570. As you can see, the trade was executed at $51.04, at the ask price. So, with the help of the block desk, the buyer was able to capitalize on the underlying securities that were not visible on the secondary market.

Figure 2 shows a similar example within a fixed-income fund, American Century Multisector Income ETF (MUSI). This trade was for 113,000 shares at $49.45 for a total value of $5,587,850, where the 30-day ADV at the time for MUSI was 3,879. Again, the block desk was able to capitalize on the underlying liquidity in the market to execute the trade efficiently at mid-price.

Figure 3 shows a trade for 5,381 shares in an international equity ETF, the Avantis Responsible International Equity ETF (AVSD).  As a newly launched ETF, the 5-day ADV for AVSD was only 194 shares. The trade was executed at $52.85 for a total value of $284,386.  This is evidence that the block desk can access the market depth not seen by the average investor.

Figure 4 is a trade in a fund that discloses holdings on a quarterly basis, American Century Focused Dynamic Growth ETF.1 The trade was efficiently executed at the ask price of $75.62 for 152,475 shares and $11,530,160 in total.  

These examples show how large ETF trades can achieve quality execution in ETFs with low on-screen liquidity. It is wise to use the tools and resources available to execute sizable trades where you think there is no liquidity. Your ETF trading desk and block desk are the dependable resources to help. Learn how Overlooking Low Volume ETFs Can Leave Alpha on the Table.

ETF Trading: Common Order Types Used To Trade ETFs

Below are common order types with guidance related to ETF block trades as well as contacts to assist you in executing these types of trades:

Order Types Description Price Control? Guaranteed Execution? Suitable for Block Trades?
Market Buy/sell executed immediately No Yes No
Not recommended for ETF block trades or even smaller ETF trades given no price control. Guaranteed execution and speed of execution are the main benefits of Market orders.
Limit Buy/sell executed at pre-determined price Yes No Yes
Recommended for both block trades and smaller ETF trades given full price control. A buy order will only go off at the trigger price or lower, and a sell order will only go off at the trigger price or higher.
Held Buy/sell executed immediately No Yes No
A Held order is the same as a Market order and is also not recommended for ETF trades.
Market Not-Held* Order goes to a floor broker or an institutional trade desk, who has both time and price discretion for execution. This usually involves getting a block desk involved Partial Yes Yes
Recommended for large ETF trades, as the broker assesses the market to achieve efficient execution and generally request quotes from more than one ETF liquidity provider to execute at the best price.
Limit Not-Held* Order goes to a floor broker, who has time and price discretion for execution, combined with a pre-defined lower limit on sells and upper limit on buys Partial No No
Similar to Market Not-Held orders with added price control from the Limit order price protection. Also recommended for large ETF trades, with the slight risk of not being executed if the only offers from the liquidity providers are outside of the limits given to the floor broker.
Stop Pre-determined price set; once market is at or breaks through it becomes a market order Partial No No
Not recommended for large ETF trades because the order becomes a market order once the trigger price is met, putting you at risk of market moves.
Stop Limit Pre-determined price set, once market is at or breaks through it becomes a limit order Partial No Yes
Recommended for large ETF trades, as it is similar to a Stop order except it becomes a limit order after the trigger price is met, providing full price control.

 

* Most advisor platforms have institutional desk available to assist in trading securities

 

If you have questions around trade execution, please refer to tools provided above or contact the American Century Investments Capital Markets Desk at 1-833-CAP-MKTS.

Contacts Description

Broker/Dealer ETF Trading Desk
  • Advisors that are on Institutional platforms have access to Block desks for ETF orders.  These desks provide trade guidance, execution expertise, and advice on trading strategies.
  • The contact information for block trading desks can be found on the platform’s website or through the platform’s advisory help center.

Issuer’s Capital Markets Desk
  • If you would like to discuss the execution for a trade and receive guidance from the Issuer’s Capital Markets desk directly, you can always reach out to them.

1

This ETF is different from traditional ETFs.

Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. Specifically:

  • You may have to pay more money to trade the ETF's shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.
  • The price you pay to buy ETF shares on an exchange may not match the value of the ETF's portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders.
  • These additional risks may be even greater in bad or uncertain market conditions.

The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF's performance. If other traders are able to copy or predict the ETF's investment strategy, however, this may hurt the ETF's performance.

For additional information regarding the unique attributes and risks of this ETF, see the additional risk discussion at the end of this material.

Contact the American Century Investments Capital Markets Desk

1-833-CAP-MKTS

Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.

You should consider a fund's investment objectives, risks, and charges and expenses carefully before you invest. The fund's prospectus or summary prospectus, which can be obtained at AmericanCenturyETFs.com, contains this and other information about the fund, and should be read carefully before investing.

You should consider the fund's investment objectives, risks, and charges and expenses carefully before you invest. The fund's prospectus or summary prospectus, which can be obtained by visiting avantisinvestors.com or calling 1-833-928-2684, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

QINT: 

This fund is not actively managed and the portfolio managers do not attempt to take defensive positions under any market conditions, including declining markets. The portfolio managers also do not generally add or remove a security from the fund until such security is similarly added or removed from the underlying index. Therefore, the fund may hold an underperforming security or not hold an outperforming security until the underlying index reacts. This may result in underperformance compared to the market generally. In addition, there is no assurance that the underlying index will be determined, composed or calculated accurately. While the index provider provides descriptions of what the underlying index is designed to achieve, the index provider does not guarantee the quality, accuracy or completeness of data in respect of its indices, and does not guarantee that the underlying index will be in line with the described index methodology. Gains, losses or costs to the fund caused by errors in the underlying index may therefore be borne by the fund and its shareholders.

MUSI: 

Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline. Lower-rated securities in which the fund invests are subject to greater credit risk, default risk and liquidity risk. If the portfolio managers’ considerations are inaccurate or misapplied, the fund’s performance may suffer.

Derivatives may be more sensitive to changes in market conditions and may amplify risks.

AVSD, MUSI: 

These funds are actively managed ETFs that do not seek to replicate the performance of a specified index. To determine whether to buy or sell a security, the portfolio managers consider, among other things, various fund requirements and standards, along with economic conditions, alternative investments, interest rates and various credit metrics. If the portfolio manager considerations are inaccurate or misapplied, the fund's performance may suffer.

AVSD: 

Historically, small cap stocks have been more volatile than the stock of larger, moreestablished companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.

The portfolio management team limits its investable universe of companies by screening out those that raise concerns based on the team’s evaluation of multiple environmental, social, and corporate governance (ESG) metrics. The portfolio managers utilize ESG data from third party sources, as well as proprietary evaluations, to decide what securities should be excluded due to ESG concerns. Because the portfolio managers screen securities based on ESG characteristics, the fund may exclude the securities of certain issuers or industry sectors for other than financial reasons and, as a result, the fund may perform differently or maintain a different risk profile than the market generally or compared to funds that do not use similar ESG-based screens. Investing based on ESG considerations may also prioritize long term rather than short term returns. Due to the lack of regulation and uniform reporting standards with respect to ESG characteristics of issuers, ESG data may be inconsistent or inaccurate across sources. In addition, all relevant ESG data considered by the team may not be available for an issuer.

FDG: 

The fund is an actively managed ETF that does not seek to replicate the performance of a specified index.

This fund may invest in a limited number of companies, which carries more risk because changes in the value of a single company may have a more significant effect, either negative or positive on the fund's value.

Because the shares are traded in the secondary market, a broker may charge a commission to execute a transaction in shares, and an investor also may incur the cost of the spread between the price at which a dealer will buy shares and the somewhat higher price at which a dealer will sell shares.

The Verified Intraday Indicative Value: Unlike traditional ETFs, the fund does not tell the public what assets it holds each day. Instead, the fund provides a verified intraday indicative value (VIIV), calculated and disseminated every second throughout the trading day by the Cboe BZX Exchange, Inc. (Listing Exchange) or by market data vendors or other information providers. It is available on websites that publish updated market quotations during the trading day, by searching for the fund's ticker plus the extension .IV, though some websites require more unique extensions. For example, the VIIV can be found on Yahoo Finance (https://finance.yahoo.com) by typing "^FDG-IV" (for Focused Dynamic Growth ETF) in the search box labeled "Quote Lookup." The VIIV is based on the current market value of the securities in the fund's portfolio on that day. The VIIV is intended to provide investors and other market participants with a highly correlated per share value of the underlying portfolio that can be compared to the current market price. The specific methodology for calculating the fund's VIIV is available on the fund's website.

Portfolio Transparency Risk: The VIIV is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the fund's shares trading at or close to the underlying net asset value (NAV) per share of the fund. There is, however, a risk, which may increase during periods of market disruption or volatility, that market prices will vary significantly from the underlying NAV of the fund. Similarly, because the fund's shares trade on the basis of a published VIIV, they may trade at a wider bid/ask spread than shares of ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and therefore, may cost investors more to trade. Although the fund seeks to benefit from keeping its portfolio information secret, some market participants may attempt to use the VIIV to identify the fund's trading strategy, which if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the fund and its shareholders.

Early Close / Trading Halt Risk: Trading in fund shares on the Listing Exchange may be halted in certain circumstances. Trading halts may have a greater impact on the fund than traditional ETFs because of its lack of transparency. An extended trading halt in a portfolio security could exacerbate discrepancies between the VIIV and the fund's NAV.

Authorized Participant / Authorized Participant Representative Concentration Risk: The fund issues and redeems shares in Creation Units to Authorized Participants. The creation and redemption process for the fund occurs through a confidential brokerage account (Confidential Account) with an agent, called an AP Representative. The fund may have a limited number of institutions that act as Authorized Participants and AP Representatives, none of which are obligated to engage in creation or redemption transactions. The fact that the fund is offering a novel and unique structure may affect the number of entities willing to act as Authorized Participants and AP Representatives. During times of market stress, Authorized Participants may be more likely to step away from this type of ETF than a traditional ETF.

Exchange Traded Funds (ETFs): Foreside Fund Services, LLC - Distributor, not affiliated with American Century Investments Services, Inc.