How would a large investment in an ETF work in practice?
Purchasing $1 billion worth of an ETF in one go would likely cause significant price movements. To avoid this, large investors often work with Authorized Participants (APs). These APs can create new ETF shares, allowing the investor to receive shares without causing major disruptions in the market.
However, there are also alternative strategies. The investor could execute the trade in smaller portions over time, known as working the order, or use methods like dark pools or over-the-counter (OTC) trading to minimize market impact.
It’s true that investing $1 billion in an ETF would be foolish. The annual fees for it are approximately 0.1%, or $1 million. You forfeit the tax loss as well as the power you are unable to vote your shares.
If someone wanted to invest a billion in SPY, their broker would likely purchase each individual stock to replicate the index. This approach is more tax-efficient and avoids management fees.
If there is not much liquidity in that ETF, he won’t be able to conceal his purchases. He could split his orders and buy gradually over 2 to 4 weeks to avoid significantly impacting the price.
You could enter into a swap contract with a bank or another large financial institution. The bank would handle purchasing the underlying assets to hedge against the position.
The family office instructs their broker to purchase the individual shares of the ETF in amounts that won’t impact the market. ETFs are more suited for everyday investors like you and me.