Managing ETF Liquidity

By Roger Nausbaum, AdvisorShares ETF Strategist

ETF.com had a detailed post titled How Illiquid Are Bond ETFs, Really? Over the years certain ETFs have had problems with pricing in the face of extreme market events. This first came to the fore in the fall of 2008 for fixed income funds when the bond market didn’t function correctly for a short while (subjectively may you think a long while as markets for commercial paper and floating rate preferreds were devastated).

Since then there have been a couple of other instances where ETFs “didn’t work” for a very short period.

Part of the equation as we learned in 2008 was that the ETFs trade more regularly than the things they track, this can be true for fixed income markets for example but typically not for domestic equities, which is a point Dave Nadig explores in great detail in the above linked article.

If you use ETFs then you should read the article to better understand the potential drawbacks to using ETFs but there are drawbacks to traditional funds as well as individual issues. One solution is to not invest at all, which I am not dismissive of but the drawback there would be the need for a much higher savings rate.

It has been three months since that 1000 point down open for the Dow when a lot of these ETF issues popped up again in conjunction with investors and advisors getting whipsawed badly as stop order selected based on an inefficient open where funds traded at very wide discounts. As an oh by the way, if you missed it, the NYSE and NASDAQ will no longer accept stop orders.