When Liquidity Matters in ETFs

I have been able to buy other ETFs in between the bid/ask spread by using a "reasonable" limit. For example, if an ETF has a spread of 10 cents, I would place a limit 2 cents below the ask and get filled a good percentage of the time; not so with my trade for DKA.

Things may have changed with DKA since. (According to WisdomTree, the specialist for DKA is Spear, Leeds & Kellogg. I'm not sure if that was the case when I bought in November.) According to Bloomberg on March 21, all the shares trading at the midpoint of the session were traded in between the bid/ask spread.

Because of the way markets work and the requirement to post orders to reflect an improvement on either side of the quote, you will get instant feedback from the specialist with either an immediate execution of your limit order or an update in the quote.

In my experience with this, if the first limit order is not executed, you'll need to buy at the offered price (offer is synonymous with ask) in order to get the trade done right then and there.

Should you even care about this? I think it depends on how long you intend to hold the fund in question. If you're an individual investor buying a few hundred shares that you intend to hold for the long term, I'm inclined to believe that a few cents' difference in execution is less important than whether the fund does what you think it will.

As I wrote in November about DKA, I bought the fund when I sold BP(BP) because I wanted less volatility within the energy sector and less single-stock risk (see the chart below).

Even if the spread being too wide at the time cost me 4 cents per share, swapping into DKA and out of BP was still the right trade. I chose DKA over something like iShares Dow Jones U.S. Energy Sector Index Fund(IYE) thinking it would outperform. While it has not traded higher than IYE, it has been a little less volatile. So luckily it worked out regardless of the 4 cents.