Trading volume has been considered an indicator of an investments’ liquidity, but it is not an accurate way to measure the viability of an ETF. Doug Sandler, chief equity officer at RiverFront Investment Group LLC, said that what most advisers forget is that ETF liquidity is based not on trading volume but on the liquidity of the investments on which the ETF is based. [Why more Institutional Investors are Using ETFs]
The technical indicators that investors should focus on when selecting an ETF are the bid-ask spread, the liquidity of the underlying index and the intrinsic net asset value of the ETF, which represents the fair value of the underlying investment and is posted every 15 seconds throughout the trading day, according to Mike Eschmann, senior vice president at Direxion. [The Latest ETF Data on Liquidity]
“Some investors haven’t yet figured out that there are more important things to look at than trading volume, because they still view ETFs through the same lens of 10 years ago, when everything was homogenous, and all ETFs in the same category did pretty much the same thing,” Ryan Issakainen, senior vice president and ETF strategist at First Trust Advisors LP, said.
Tisha Guerrero contributed to this article.