Switch It Up and Pair Your ETF Trades

When investors are making an allocation change from one exchange traded fund (ETF) exposure to another, using a “switch” trading strategy can create efficiencies to improve overall execution cost and quality.

A switch trade is when an investor presents both the buy and sell order of two separate block trades to the same market makers. Especially in tax loss harvest trades or a change in asset class manager, these ETF exposures have overlapping or at the very least, correlated holdings. If market makers are able to buy the ETF an investor is selling, and simultaneously sell the ETF the investor is buying, they are creating a natural hedge to offsetting long/short pair trade. This trading strategy can help reduce the market makers cost and risk of providing the liquidity, should they have only priced the trade as two separate transactions. When risk and cost can be reduced for market makers, pricing can be more efficient for the end investor which would only add to their bottom-line return.

In this hypothetical example, an investor was able to implement a tax loss harvest trade from ETF A into ETF B as a perfectly executed “Switch Trade”. If ETF A was sold at midpoint of the bid/offer spread and if the investor was able to buy ETF B on the BID, the investor may potentially generate a spread savings of $700! This is significant because, if you assume in an in individual trade, ETF A would likely sell on the bid and ETF B bought on the offer. That’s real money and it goes directly to the investors bottom line return.

ETF Switch Trade

By working issuer capital markets experts and investor platform trading desks who have the ability to price switch trades with the marketing making community, even better ETF trading outcomes are within reach.

Learn more about investing in Matthews Active ETFs at matthewsasia.com/ETFs.