This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

When Liquidity Matters in ETFs

A reader wrote in to ask me about ETF liquidity, saying he was interested in buying iShares S&P Global Telecommunications Sector Index Fund (IXP) because he believed it looked good technically. He was focused on a pop higher, by about 0.66%, at the open Wednesday on what he saw as a 1,000-share trade.

The easiest way for me to start assessing his take on the fund was to look at a similar product for comparison. The WisdomTree International Communications Sector Fund (DGG) opened higher by about 0.5%-1%, so my take was that the move in IXP was nothing out of the ordinary.

Liquidity does appear to be an issue with a lot of ETFs, but the number of shares actually traded is far less important than the specialist's willingness to execute orders. Think of it this way: If an ETF with a wide bid/ask spread has traded only 300 shares today but the specialist will execute a 10,000-share order at the ask price or a penny below, the 300 shares traded prior mean nothing.

Ideally, from the ETF provider's prospective, an ETF should be thought of as accommodative for trading. Providers are hoping to attract both individual and institutional investors, so any perception of an ETF being difficult to trade works against the provider's interest. And because the provider hires the specialist, poor trade executions would seem to work against the specialist's interests, too.

Remember, that's the ideal, which means it's also not always the case in practice. I have written many columns about the ETFs by WisdomTree and am favorably disposed to the firm's methodology; I integrated WisdomTree's International Energy Sector Fund (DKA) across the board in client accounts in November, as I wrote then , and have been very pleased. I have also used a few other WisdomTree funds on a smaller scale for quite a few clients. However, my experience in trying to buy DKA was a poor one.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
BP $42.89 0.00%
IWM $124.43 0.00%
IYE $46.11 0.00%
IXP $62.80 0.00%
OIH $37.36 0.00%

Markets

DOW 17,826.30 -279.47 -1.54%
S&P 500 2,081.18 -23.81 -1.13%
NASDAQ 4,931.8150 -75.9760 -1.52%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs