Debunking Myths About ETF Liquidity
We took a look at three common misconceptions that can contribute to increased costs. Explore each of them to find out how to avoid these costly mistakes.
Myth: ETFs with the lowest expense ratios have the lowest total costs
Fact: Look beyond the expense ratio
An ETF's expense ratio and trading costs are not correlated — so a low-fee fund may not have the lowest total cost of ownership (TCO).
To calculate an ETF's cost, a combination of technical and strategy-specific factors come into play:
- Bid-ask spreads
- Rebalance frequency
- Rebalance size
Learn how to account for the true costs of owning an ETF before you make your next trading decision.
Myth: A single metric is all you need to gauge an ETF’s liquidity
Fact: Get the complete liquidity picture
Investors often use point-in-time statistics like 30 or 90-day average trading volume to analyze an ETF's liquidity.
But a fund's liquidity profile can change in different markets. Your ETF due diligence should:
- Look beyond on-screen liquidity
- Analyze bid-ask spreads over various time periods, times of day and market environments
- Evaluate the fund's profile, from daily trading volume to assets under management
Get the roadmap for navigating the twists and turns of an ETF's liquidity dynamics.
Myth: All ETF trade execution is the same
Fact: Choose the right execution strategy
ETF investors can choose from a variety of execution strategies to control cost.
Because ETFs trade on an exchange with primary and secondary market liquidity, you have the flexibility to choose:
- Order type, such as market or limit
- Order execution, with help from institutional trading desks or authorized participants
Learn how to more effectively execute your ETF trades.