When Liquidity Matters in ETFs

03/23/07 - 09:12 AM EDT

Roger Nusbaum

If you are an investment manager and need a large quantity, you have the luxury of buying small pieces of your total position throughout the day and giving all clients an average price, which is how I execute most across-the-board trades.

But for anyone, individual or professional, looking for a short-term trade, I'd say that 3-4 cents is much more likely to be an obstacle. While there is probably liquidity to execute the order without moving the market up a lot, missing 4 cents coming and going on a $25 ETF to be held for just a few days probably would deter me from lesser-traded ETFs.

None of this is really an issue for more popular ETFs such as the Oil Services HOLDRs(OIH Quote - Cramer on OIH - Stock Picks) or the iShares Russell 2000 Index Fund(IWM Quote - Cramer on IWM - Stock Picks).

If this is an issue important to you, you probably should experiment to see which ETFs offer what I'll call friendlier treatment for reasonable limit orders.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider iShares S&P Global Telecommunications Sector Index Fund, WisdomTree International Communications Sector Fund and WisdomTree International Energy Sector Fund to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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At the time of publication, Nusbaum was long International Energy Sector Fund in client accounts, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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