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Many people are confused about the liquidity of ETFs. That’s why we decided to make it the topic of our weekly podcast. Tom and Brendan discuss liquidity and whether or not daily volume is important to ETFs in this week’s Mullooly Asset Management podcast.
We thought the best way to illustrate trading volume’s importance to ETFs was through a real example. It happened just last week in our office.
We needed to sell 37,000 shares of an ETF we held across several accounts. The bid price (selling price) on that particular day was $34.08. The ask price (buying price) was slightly more at $34.11. The trading volume at the time was 30,000 shares. Most people would see a big problem here. We wanted to move 37,000 shares, but until that point only 30,000 had been traded all day.
In this particular instance, we ended up selling the ETF (all 37,000 shares) for $34.08, the posted bid price. The ETF continued to trade at that same price for the remainder of the day’s session. We didn’t upset the market or cause a big drop in the ETFs price by moving a position larger than the daily trading volume.
Many financial professionals and personalities featured in the media warn investors to stay away from thinly traded ETFs. As you can see from our example, their advice might not be totally sound. Is daily volume important to ETFs? It certainly isn’t the most important thing to be considering, but plenty of people will tell you otherwise. As always, make sure to consult your personal investment advisor before making a decision to buy or sell any type of investment.
If you’re interested in reading more on this topic, here’s a good post about how thin trading volume doesn’t necessarily mean low liquidity in ETFs (http://finance.yahoo.com/news/thin-trading-volume-etfs-does-105715234.html)
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