Advisors should be using these same tools when they are placing a large block of shares (buy or sell) in a thinly traded ETF. Make sure that you contact your broker to help you execute and they will most likely do it at no additional fee. They want the volume as much as you do.
For smaller individual investors, I would recommend a limit order as opposed to a market order. This ensures you get filled at the price you specify (or better) rather than at the whims of the day. If you feel like your bid isn’t getting filled, try calling your broker and see if they can work it out for you. Just make sure you ask for them to waive any exorbitant phone order transaction pricing if the trade goes through.
3. This works best for intermediate to long-term investors.
If you are “Tommy Trader” looking to scalp 5 pennies on the S&P 500 with every little twitch in the market, then stay away from thinly traded ETFs. You want the big boys like SPDR S&P 500 ETF (SPY) or PowerShares QQQ (QQQ). The funds that trade like water no matter what the market is doing on any given day. Let’s face it – those traders don’t really care about composition or cost. All they care about is direction and speed.
Those who may be considering a thinly traded ETF should be doing so with the expectation of holding the position for a reasonable period of time. That’s the only way you are going to experience the value, alpha, or other perceived benefits that drove you to choose the fund in the first place. You want to give it time to work given the composition of the portfolio relative to other competitive options.
You also have to be prepared for those weird days when it trades next to nothing. A thinly traded ETF may finish the day at a premium or discount to its net asset value that will true up in subsequent market sessions. Don’t go into histrionics when this occurs and understand that the fund will adjust as necessary to correctly price the basket of holdings.
Related: The Name is Bond, Long Bond
The Bottom Line
There are many reasons investors may choose to own an off-beat exchange-traded fund and volume should not necessarily be a disqualifying factor. With proper analysis and trading preparation, you can make a solid investment choice that adds value to your portfolio.