Tan Kin Lian's Blog: Liquidity of STI Exchange Traded Funds

Friday, November 23, 2007

Liquidity of STI Exchange Traded Funds

Hi Mr. Tan,

You recommended investing in the STI exchange traded fund. But, I find the volume to be small. Just 1 or 2 lots a day. How can I accumulate a large volume in this thin market?

REPLY

If you wish to buy a large quantity of ETF, the fund manager (i.e. State Streets) will sell the ETF units to you and create new units by buying the underlying shares from the market.

Similarly, if you wish to sell a large quantity of ETF, the fund manager will buy the ETF units from you and redeem the units by selling the underlying shares to the market.

In actual fact, the fund manager makes the market. They will do it at the fair price of the ETF shares (which should reflect the value of the underlying shares). There is no lack of liquidity.

8 comments:

Anonymous said...: Hi Mr Tan,

Who is the fund manager that we can approach? What is the minimum investment sum for STI ETF? Thank you for your information.; November 23, 2007 5:08 PM
Anonymous said...: Mr Tan

Do you buy through your normal stockbroking firm or do you buy direct from State Streets?

Thanks.; November 23, 2007 5:17 PM
eng60340 said...: "If you wish to buy a large quantity of ETF, the fund manager (i.e. State Streets) will sell the ETF units to you and create new units by buying the underlying shares from the market." where can i find more info regarding this. you are the first person who tells me this. (it's good news! )

also. how large is large ? and how do they price the new shares ?; November 23, 2007 8:15 PM
Tan Kin Lian said...: Reply to eng60340.

I was told about this matter two years ago by the head of investments in NTUC Income.

At my request, my stockbroker checked this matter and confirmed tht this is the practice. The fund manager (State Street) will make the market and create new units at the correct price.

You can buy or sell the ETF through your stockbroker (and not State Street).; November 24, 2007 12:42 AM
hongjun said...: eng60340,

I also heard this is the practice. In fact, this is what's being practised for all ETFs (not only STI ETF). I just cannot find the reference link for you.

You will need to buy through a broker.

hongjun; November 24, 2007 10:12 PM
hongjun said...: You can read this

An Inside Look At ETF Construction
http://www.investopedia.com/articles/mutualfund/05/062705.asp

Cheers
hongjun; November 24, 2007 10:19 PM
Anonymous said...: Only if the investor is doing a block trade of ETF will the market maker, i.e. State Street in this case, create or redeem the ETF units. In this case, the investor goes straight to the market maker and pays a fee to the it for the trade.

For small investors trading a few lots of ETF, the marker maker will not be involved. The small investors will trade amongst themselves via the usual brokers. Hence, if there is a lack of small investors trading in the ETF, there will be little liquidity.

Hence, whereas liquidity is guaranteed for large investors, it is not so for small investors.; November 30, 2007 12:36 PM
Anonymous said...: According to the article provided by Loh Hon Chun, there is this info:

"The authorized participant borrows shares of stock, often from a pension fund, and places those shares in a trust, and uses them to form creation units of the ETF. Creation units are bundles of stock varying from 10,000 to 600,000 shares, but 50,000 shares is what's commonly designated as one creation unit of a given ETF. "

Hence, it is correct that, as mentioned by one reader, that the liquity of ETF is guarantee for large investor, but not small investor.; January 27, 2008 10:59 PM