One factor that shouldn’t be overlooked by investors choosing between several exchange traded funds (ETFs) is trading volume.
That’s because funds with the higher activity tend to save their investors a few ducats, according to data mined by Richard Widows for The Street.
Widows compared ETFs with high trading volume against those with lower trading volume. He discovered that those with the lowest average trading volume from December 2007 to January 2008 gave their holders an annual expense ratio that was more than double of the 50 ETFs with the highest turnover.
Heavier trading volumes tend to be associated with larger funds that can spread expenses over a large base of ownership. An ETFs expense ratio can represents a constant cost paid over an investors entire holding period of the fund, but trading expenses can also eat into the overall return o the investment.
A measurement of differentials between bids and ask quotes over a two-day period showed that investors of low-volume ETFs were certain to be confronted with higher transaction spreads, compared to the higher volume ETFs. Long-term investors, however, can spread these expenses out over lengthy holding periods to minimize the impact on their returns.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.