January 27, 2008 at 1:00 am by Tom Lydon
Ever wonder if your exchange traded funds (ETFs) are liquid enough for your taste?
You can check the liquidity yourself with the bid-ask spread. Although ETFs trade like stocks, trading volume does not give good insight into how easily they trade, because the underlying securities make the difference. Jesse Emspak for Investor’s Business Daily reports that liquidity is important when an ETF you want to sell hits a price target or isn’t performing at all.
If a stock is thinly traded, it will be harder to sell, and wider spreads indicate that it’s harder for issuers to meet demand. This shows that underlying stocks are less liquid. As a rule, small-cap growth stocks are usually less liquid than their large-cap counterparts. Market-makers and traders have your best interests in mind, since the larger the volume of the trade, the more money they make, too.
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January 28th, 2008 at 10:34 am
Speaking Of Liquidity, just last Tuesday, 01/22/08 it took over an hour for my broker to sell 1,000 share of SKF, the Proshares Ultra-Short Financials ETF. In the meantime the value fell by over $13,000. Luckily I filed a trade complaint and the brokerage house reimbursed me for my $13,000. loss due to the one hour trade delay. I suspect there was some type of insider shenanigans by someone shorting the SKF ETF and covering the short with my shares. Who Knows???
January 28th, 2008 at 10:35 am
What is a reasonable bid-asked spread andwhat is a bid-asked spread that indicates it is thinly traded?
Thanks in advance.
John Neumann
January 28th, 2008 at 12:21 pm
Where there is real lack of liquidity is on the puts and calls of ETF’s. So if you do them you know that, but inversely, this shows a lack of liquidity/interest in that ETF.
January 30th, 2008 at 10:09 am
The bid/ask spread can increase during days of high market volatility….especially with foreign ETFs. To avoid getting caught in this game, we suggest placing limit orders within the bid/ask range. Anything more than .5% is unreasonable. -Tom