My usual gig here on the blog is to report on ETF inflows and outflows, which is a great way to help investors identify emerging trends. Something that always strikes me is that if you only read my blog posts, you might get the impression that the categories I’m discussing (for example, broad US equity or high yield bonds) are the only ETFs seeing any trading action.
But with ETFs making up more than 25% of equity market trading volume most months, this simply isn’t the case.
The truth is, even funds that don’t have net inflows and outflows – or primary market activity – can still experience considerable secondary market trading volume. What’s more, the fact that they do is a great illustration of one of the most salient benefits of ETFs.
For many ETFs, significant two-way (buy and sell) activity generally means that investors can trade the fund back and forth without there being a need for creations and redemptions. The iShares Emerging Markets ETF (EEM) is a great example of this phenomenon. Because some of the fund’s underlying securities tend to be thinly traded and hard to access, EEM has become a preferred vehicle for trading these emerging markets stocks. As a result, it has grown very large (~$39 billion as of 9/11/13) and typically sees a lot of secondary market trading volume.
For example, between August 6th-13th (six consecutive trading days), EEM had no net inflows or outflows. Meanwhile, the fund’s average daily volume (ADV) during that time was $2.4 billion. Close to 360 million shares, or $14.2 billion, changed hands without any need to tap into primary market liquidity. That’s a lot of two-way volume.