January 30, 2007 at 1:19 pm by Tom Lydon
Lack of liquidity has been an issue with some of the new exchange traded funds (ETFs). These ETFs are not as heavily traded or do not have the volume that some of the more established ETFs have. Quant Investor for Seeking Alpha uses the Claymore/Sabrient Defender ETF (DEF) as an example. Using a small test trade of 1,000 shares, he found there was a problem with "price improvement" and those who use limit orders. With spreads up to 4 cents, one might want to use a limit order, but they may miss execution if the the price goes up.
In the end, it is important to keep in mind the trading volume and liquidity of an ETF when purchasing a large order. This is especially true of some of the newer thinly traded ETFs.
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