ETF Capital Markets Desk: When Volume Doesn’t Tell the Whole Story

    David Mann

    David MannHead of Capital Markets, Global Exchange-Traded Funds (ETFs), Franklin Templeton Investments

    David Mann, Franklin Templeton’s head of Capital Markets, Global Exchange-Traded Funds (ETFs), revisits the topic of ETF volume with a real-world example. He outlines how after-hours trades can seem to go missing in the day’s volume tally.

    When we kicked off this blog back in 2016, my very first post discussed the misconception of using a fund’s volume as an accurate measure of liquidity. As it turns out, there is another problem with volume which is that the metric itself is not always accurate. Let’s look at a quick example.

    On Wednesday, February 21, 2018, an investor bought 625,058 shares (around $18 million) of FLBR, Franklin FTSE Brazil ETF. I have talked previously about investors working with ETF liquidity providers on all the possible options to leverage the liquidity of the underlying basket when trading larger sizes of a new ETF. In this case, the investor elected to trade based off of that day’s net asset value (NAV).1

    The trade was executed at a price of $28.6405 and the NAV on February 21 was $28.6233. This is a six-basis-points premium to NAV and a great example of an investor leveraging the liquidity of the underlying basket. However, the ETF liquidity story is not the point of this post. Instead let’s talk about how that trade is reported.

    Typically, NAV trades are reported the next trading day before the market opens, since the official NAV on the trade date is not known until well after the market close. In this case, the FLBR trade was reported at 8:04 a.m. EST on Thursday, February 22, with a flag to note that it was a prior-day trade.

    But now we have a bit of a problem. Once a security is closed for the day and its official volume is determined, that number is never to be adjusted again. This makes sense as official volume is used everywhere and having that value change after the fact could be problematic. But the next trading day does not want to include that volume either since that trade was flagged as a prior day trade.

    The end result is that there is a reported trade (in this case, a very large one) that is NOT included in that ETF’s volume.

    Putting real numbers to this for FLBR, its average daily volume since inception on November 6, 2017, through February 21, 2018, according to Bloomberg, is 17,031 shares. But, that does not include the largest trade that fund has seen. If we include the large trade, that number jumps to 26,501.

    Many of you might be shrugging your shoulders wondering why any of this matters. Well, there are many ETF investors who still use average daily volume as one of the main determining factors for their ETF selection. If their line in the sand is to use ETFs with an average daily volume of 25,000 shares or higher, then FLBR would miss the cut. And that kind of thinking would be a shame…at least from the perspective of the author of this blog.

    David Mann’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

    This information is intended for US residents only.

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    1. Net Asset Value (NAV) represents an ETF’s per-share-value. The NAV per share is determined by dividing the total NAV of the Fund by the number of shares outstanding. The Fund calculates the NAV per share each business day as of 1 p.m. Pacific time which normally coincides with the close of trading on the New York Stock Exchange (NYSE) and BATS BZX Exchange (BATS). The Fund does not calculate the NAV on days the NYSE and BATS are closed for trading. If the NYSE and BATS have a scheduled early close or unscheduled early close, the Fund’s share price would still be determined as of 1 p.m. Pacific time.

    What are the Risks?

    Franklin FTSE Brazil ETF (FLBR)

    All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. The Brazilian economy has experienced in the past, and may continue to experience, periods of high inflation rates and political unrest. Because the fund invests its assets primarily in companies in a specific country or region the fund may also experience greater volatility than a fund that is more broadly diversified geographically. As a non-diversified fund, the fund may invest in a relatively small number of issuers and, as a result, be subject to a greater risk of loss with respect to its portfolio securities. These and other risk considerations are discussed in the fund’s prospectus.

    ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETFs’ net asset value. Brokerage commissions and ETF expenses will reduce returns.

    Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/342-5236 or visit Please carefully read a prospectus before you invest or send money.

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