Daily volume in the 50 most-traded ETFs listed in the U.S. fell to the lowest levels since 2007 in January, excluding the last month of the year, the Financial Times reports.
The decline in volume has boosted trading costs, including spreads, in some smaller exchange traded funds, according to the report. Aside from trading volume, it’s also important to consider the liquidity of the underlying basket when judging an ETF’s overall liquidity.
“Volumes have to be one of the key considerations for any ETF investor: if liquidity dries up, trading costs could increase,” said Bryce James, chief investment officer at Smart Portfolios, in the FT story.
The pullback in ETF volumes could be the result of lower trading by hedge funds, according to the report.
Despite falling volumes, ETFs managed to gather healthy inflows of about $29 billion last month. [January ETF Flows]
Thinner ETF trading overlapped with a decline in volatility and correlations in January, the FT said.
“As correlations and volatility have come in, some investors are tending towards stockpicking strategies instead [of ETFs],” said BJ Prager, head of Americas exchange traded product trading at Barclays Capital, in the article.