Moskowitz also points out that liquidity may be a contributing factor to costs of investing in an ETF. For instance, a highly liquid ETF allows investors to weave in an out of a market, but it may also tempt people to day trade the funds.
Consequently, if an investor is frequently trading an ETF on short-term market moves, he or she should invest with high conviction. Additionally, the investor would also incur trading fees, which can pile up if one is going in and out of a position frequently. Nevertheless, there are a number of brokerage platforms that provide commission-free trades on a select group of ETFs. [Six Popular Commission-Free ETF Trading Platforms]
Moreover, since ETFs trade like stocks on an exchange, investors should mind the bid-ask spread and avoid unnecessary costs associated with executing trades. When an ETF trades with a high volume, traders enjoy tight spreads, but some less popular ETFs may trade with wider spreads. Consequently, investors should utilize limit orders to control and better execute trades. [Trading ETFs: Why Use Limit Orders]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.