As more investors look into the benefits of exchange traded funds, it is important to understand that ETFs are not like the traditional funds that many have used over the decades.
“One of the most important things is to know the average daily volume,” Shana Martin, ETF Product Manager for Nationwide Fund Advisors, said at the 2018 Morningstar Invest Conference. “I think a lot of advisors look at this as a key metric with learning how to trade the ETF, and you see a product that has a high average daily volume, or ADV, that product you can ultimately use that as a very liquid, very quick trading vehicle for a tactical movement.”
However, there are also a number of ETFs that trade with lower volumes and exhibit wider bid/ask spreads that may cut into overall returns when investors try to execute a trade. To limit these potential negative effects of trading with ETFs, investors and advisors will have to keep a few pointers in mind.
“Don’t trade at the open or close. That’s when the spreads really widen out because there’s a lot of price discovery at those time periods,” Martin said.