The exchange traded fund industry has flourished over the years, however, of the 1,400 funds trading, assets are concentrated in a handful of funds. Most advisers use trading volume as a measure of liquidity, which limits the number of ETFs that are even considered in a portfolio.
“Clearly, advisers and wealth managers are avoiding some ETFs because they’re only looking at the trading volume,” said Reginald M. Brown, managing director of the ETF unit at Knight Securities Group, a trading platform that accounts for nearly 20% of all ETF trades. [What is an ETF? – Part 13: Trading Liquidity]
Currently, there are around 1,400 ETFs trading with more than two-thirds of the trading volume focused on these and about half of ETF industry assets concentrated in them, reports Jeff Benjamin for Investment News. [I’ve Seen the Future of ETFs]
Trading volume is an important attribute of an ETF, as lower activity equals wide spreads, higher costs, and possibly a lack of buyers when it is time to sell it. However, a more accurate interpretation of liquidity in ETFs would be to look at an ETF’s average trading volume and the average daily trading volume of underlying securities. ETF liquidity is based on everything that is inside the index or basket that the ETFs track since the funds are also shareholders of their underlying stock components.