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Question of the Week - June 7th 2016

How does the cost of trading an ETF compare to trading the underlying basket?

 

Chart 1: Expected Cost and Order Size for US ETFs 

 

Chart 2: Expected Cost and Order Size for Corresponding ETF Baskets 

 

  • As the prevalence of ETFs in the US marketplace grows, we continue to examine trends in costs and behavior. Using ITG’s pre-trade tool, we examined the transaction cost to trade an ETF versus the transaction cost to trade the underlying basket. We examined seven US ETFs of varying liquidity.
  • The first chart shows the expected cost to trade 5 million shares of the ETF, while the second chart shows the expected cost to trade an equivalent amount of the underlying ETF.
  • In all cases, the expected cost of buying the ETF is less than the expected cost of trading the basket and we see much larger order sizes (compared to % of median daily volume) for the ETF security type.

 

Pre-trade costs are calculated based on ITG’s proprietary cost model, ACE, using an optimal strategy with neutral aversion to risk as of 3/31/2016.

 

Refer to ITG Peer Analytics for information on available ITG Peer Group Database based analytics.

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