Understand ETFs to More Effectively Access Markets

Exchange traded funds are relatively new in the industry, and to efficiently and effectively trade the instrument, investors should adequately familiarize themselves with the investment tool.

ETFs try to passively reflect the performance of a benchmark index, providing investors exposure to a portfolio of assets or securities, but not every ETF is blessed with deep liquidity and tight bid-ask spreads. Nevertheless, there are a number of ETF trading tips to help investors get the most bang out of their money.

What many perceive as normal ETF trading volume is not the true indicator of its liquidity. ETFs trade on a exchange like a common company stock, and less popularly traded ETFs may exhibited wide bid-ask spreads. However, since ETFs track an underlying index, their true liquidity is reflected by the volume of their underlying securities.

“If the underlying securities you are accessing through the ETF are liquid, you should have confidence you will be able to easily enter and exit the position in the ETF,” according to a recent Direxion Investments note.

Those who are worried about whether or not there is enough liquidity to get a fair price can call their broker or trading desk for more up-to-date pricing.