TrimTabs attributes the divergence in flows between low-volume and high-volume ETFs is being exacerbated by three bad habits: First, large financial institutions require a security to have a certain trading volume and market value before they are allowed to trade in it. Secondly, investors are trapped in a familiarity bias where people associated liquidity in ETFs as similar to stocks. Lastly, investors tend to be more comfortable with large, well-known names.
“Investors often ignore low-volume ETFs, mistakenly believing they are illiquid and too risky,” Biderman added. “They’re missing out on a lot of profitable, low-volume funds that are flying under their radar.”
The research firm discovered that the lowest-volume U.S. equity ETFs rose 22% over the past 9 months, whereas high volume ETFs gained 21.5%.
For more information on ETF assets, visit our ETF performance reports category.
Max Chen contributed to this article.