This article was provided courtesy of ETFtrends.com.
Many advisors, institutions and investors use average daily trading volume to base investment decisions. However, the common notions of liquidity, specifically the term “illiquid,” can not be aptly applied to the exchange traded fund investment vehicle.
“Abused notions such as ‘Only invest in ETFs that trade at least 100,000 shares of average daily trading volume,’ and ‘Only invest in an ETF that has at least $100 million in AUM’ have become common in the popular ETF media as well as being major drivers of faulty decision-making across the advisory community,” according to slides prepared for a webcast by Street One Financial and FA Magazine.
ETFs are based on a basket of underlying securities. As such, an ETF is only as liquid as its underlying stocks, bonds or other component holdings.
“Illiquid should be reserved for only ‘illiquid’ products such as Hedge Funds and Private Equity investments that may be subject to lock-up periods and other obstacles in selling a position,” according to the webcast.
For any given ETF, the “visual” or “perceived” liquidity may show a wider bid/ask spread than an investor or advisor is willing to take.