Big Trade On iShares ETF Proves Liquidity

How did such a massive block of HEWG trade without a hitch?

A few months ago, I blogged about the unique structure behind iShares’ new suite of currency-hedged ETFs, which is designed to boost liquidity and to lower overall costs.

In short, the new products use other blockbuster iShares ETFs as their sole holding, with a simple forward currency contract overlay to neutralize currency exposure.

It looks like the iShares Currency Hedged MSCI Germany ETF (HEWG) just pulled off a massive trade that pretty much sums up just how efficient this structure is.

On May 22, HEWG traded 1.88 million shares, amounting to roughly $46.6 million. Prior to that day, HEWG averaged only 383 shares traded a day. To put the large trade into perspective relative to average volume before the trade, the big trade amounted to roughly 4,900 percent of the fund’s average daily volume up to that point!

In fact, since its launch on Jan. 31, 2014, HEWG has seen more days with zero trading activity than not. According to our ETF.com Analytics data, even after this monster trade, HEWG’s median daily dollar volume still remains zero. This means that on more than half of the past 45 trading days, HEWG had no trade executions.

Normally for a fund this “illiquid,” you wouldn’t only expect massively wide spreads, but also complexities around executing such a large order without impacting the market and incurring costs.

Yet if you look at the tape, what’s remarkable is that a massive block of shares (1.585 million) was executed at the offer (3 cent spreads) with no market impact.

Source: Bloomberg

Based on our ETF.com Fund Flows tool, you can see a massive inflow of $48 million on May 27 (remember T+3 trade settlement). So, clearly, this trade was a buy order, likely from one or a select few institutions.

Source: ETF.com

I remember looking at HEWG’s assets under management only a few weeks ago, and it was roughly $5 million—about the amount where the fund seeded. This means that HEWG had inflows close to 1,000 percent of its previous assets from this single day.

So, how did HEWG pull off such a massive trade with no market impact?

Again, the key here is the liquidity of HEWG’s underlying holding, the iShares MSCI Germany ETF (EWG | A-97). EWG is one of the most liquid international ETFs on the planet, trading more $73 million on most days at pennywide spreads.

This means that creations and redemptions are done in-kind using EWG, as opposed to the underlying constituents of that index. By the way, those underlying stocks in EWG trade in Germany, meaning they only have two hours of overlap of trading with U.S. market hours.

I love highlighting these types of trades, because it reminds us that an ETF’s true liquidity is twofold—primary and secondary. Our Chief Investment Officer Dave Nadig also wrote a blog on this subject, highlighting a massive trade in the WisdomTree Brazilian Real ETF (BZF | B-91). It was a similar story to HEWG’s big trade, in that it was carried off with minimal impact.

But HEWG’s minimal-impact mega-trade also proves how structural innovation can work in the best interests of both the issuers and the shareholders.

As a side note, iShares recently launched two more products with a similar structure: the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) and the iShares Interest Rate Hedged High Yield ETF (HYGH).

These two fixed-income products overlay two of iShares’ blockbuster ETFs with an overlay of Treasury futures contracts used to hedge interest-rate risk. I would expect similar robust block liquidity in these funds as iShares’ suite of currency-hedged products.

The takeaway here: Don’t judge an ETF’s liquidity simply by its on-screen trading history. Oftentimes, an ETF’s underlying liquidity is deep and simply requires a phone call to the issuer or liquidity provider to execute with efficiency.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.