Implied Liquidity
While there’s a tendency for investors to equate liquidity with volume, it’s a misconception that they always need to be in the most traded products to have the ability to enter and exit large positions, according to Michael Gayed, the chief investment strategist who helps manage $220 million at Pension Partners LLC in New York.
The newer iShares Core MSCI Emerging Markets fund has an average 30-day volume of 655,000 shares, or $34.4 million. Meanwhile its implied liquidity of 4.7 million shares indicates the ETF basket could trade more than $250 million of notional value daily, according to data compiled by Bloomberg.
Implied liquidity represents the number of ETF shares that could potentially be traded as indicated by the volume of each component in its holdings.
Market Inefficiency
“This is a classic example of individual behavior that causes inefficiency in the marketplace,” Gayed said in a telephone interview. “People are paying more for the same result. EEM has become somewhat of a brand for emerging markets.”
That brand means established ETFs won’t be fading away anytime soon, according to KCG’s Hempstead.
While the core fund, which hasn’t had a single day of outflows since it began trading in October 2012, is attracting individual and long-term investors, the veteran BlackRock ETF continues to lure institutional asset managers and traders seeking to execute larger transactions without drawing market attention.
“The first mover advantage has been phenomenal,” Hempstead said. “These are just the most popular funds in the room. They were the first to market, and as long as they don’t change materially, there’ll always be that core group of investors that want to own it.”