Exchange traded funds come in all shapes and sizes, but investors tend to shy away from ETF products with low trading volumes. Fund providers, though, contend that potential investors have misconstrued liquidity concerns and are only missing out on ways to expand their portfolios.
“We want investors to have a good experience and to utilize ETFs that would be most beneficial to their portfolio,” Ryan Issakainen, senior VP and ETF strategist at First Trust, said, reports Jackie Noblett for Ignites. “It’s an important issue because when they understand liquidity, it opens up a whole new universe of ETFs they can use.”
Additionally, liquidity misconceptions have led to a negative impact on fund products available to advisors.
“It becomes a chicken-and-egg syndrome,” Tony Davidow, managing director and ETF portfolio strategist at Guggenheim Investments, said in the report. “You need the trading to get the assets, and unfortunately what happens is a lot of products come out, they don’t get the attention they deserve from the platforms, which would drive the trading and then drive the assets.”
As a result of the innate creation and redemption mechanism in every ETF product, ETFs are really as liquid as the underlying securities in the fund. The creation/redemption process allows advisors and investors to make block trades in an ETF, with no market impact. [What is an ETF? — Part 4: In-Kind Creations and Redemptions]
Large sponsors also offer capital markets services to help facilitate trades between market makers and other liquidity providers to purchase block ETFs through creation units at net asset value. This way, trades would go through without driving up share prices on the open market. [What is an ETF? — Part 7: Bid/Ask Spread]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.