ETF Capital Markets Desk: Revisiting (Again!) the Problems of ETF Volume

    David Mann

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

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

    Earlier this year, I worked through an example that highlights one of the biggest flaws of using average daily volume as an accurate measure of an ETF’s liquidity. The takeaway: when investors decide to trade via net asset value (NAV),1 the trade is reported the next morning and WILL NOT be included in that ETF’s official volume for either day.

    That post walks through how this happens, so I am not going to rehash it here. The result was that the average daily volume at the time of that February 21 trade in Franklin FTSE Brazil ETF ( FLBR) was underreported by around 9,000 shares.

    Well, this underreporting issue happened again at an even larger amount! This time, the trade was in our Franklin FTSE Japan ETF (FLJP). The investor bought 5.4 million shares (approximately $146 million) based on the NAV of Wednesday, May 23. The trade was reported the next morning at 8:05 a.m. EST with a prior-day flag, just as we saw last time with FLBR. Any volume reports will not include this trade. Two main points:

    1. Excuse my rant, but I think this is misleading. The “official” average daily volume for FLJP from inception through Thursday, May 24, is 32,500 shares. If this trade had been included, that number would jump to almost 73,000 shares per day. The real average volume is more than double what was reported, which has huge implications for anyone screening by that metric. Putting it another way: the single most important trading day in the life of FLJP is being omitted!

    2. What we should be talking about is the trade itself. An investor was able to purchase $146 million of FLJP at 4.5 basis points (bps) over NAV. That is an incredible example of how ETF market participants can leverage the liquidity of the underlying basket when trading larger amounts, no matter the size or volume of the fund.

    This is now the second notable time this has happened in our ETFs, and I have no doubt that it is happening in other ETFs as well. As long as there are still gatekeepers who judge an ETF by its official volume, we will continue to highlight instances that show the flaws of using volume as a determining metric.

    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.

    To comment or post your question on this subject, follow us on Twitter @LibertyShares and on LinkedIn.


    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?

    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 Franklin FTSE Brazil Fund and Franklin FTSE Japan Fund invest assets primarily in companies in a specific country or region, the funds may also experience greater volatility than funds that are more broadly diversified geographically. As non-diversified funds, they may invest in a relatively small number of issuers and, as a result, be subject to a greater risk of loss with respect to portfolio securities.

    These and other risk considerations are discussed in the Franklin FTSE Brazil Fund’s prospectus and the Franklin FTSE Japan 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.

    FTSE Russell is the source of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of FTSE Russell. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.