Exchange traded funds (ETFs) have seen lots of trading activity lately, and this is a great thing for those of you who own these funds.

More activity equals less expensive market exposure, more tax efficiency, and a tighter market, as Matthew Hougan for Index Universe notes.

These are reasons why every trade of an ETF you own puts more money into your pocket:

• Tightens the spread. The more trades, the tighter the bid/ask spread becomes. When you sell or buy the fund, the price becomes as close to fair market value as possible.
• More tax efficiency. When lots of trading activity is going on, the institutional investors are creating and redeeming shares of ETFs. This is the key to tax efficiency because each time a share is redeemed, the provider can dispose of any stocks they own with low cost bases and no tax event incurs.
• ETF shares stay true to fair market value. ETFs already track close to their net asset value (NAV), with the more trading they do, the better. More trading makes it hard for arbitrageurs to exploit any difference between an ETF’s share price and fair value.

Best of all, there is no cost to you, the shareholder, when someone else trades an ETF.

In the three years we’ve been running ETF Trends, we’ve seen ETFs really come into their own. There’s much more liquidity, more assets and better tracking of their underlying indexes.

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