An ETF’s Volume is not a representation of its liquidity.
If your concern is liquidity – don’t ask about volume. For that matter, don’t ask about Assets Under Management either. The average daily volume or assets inside of an ETF do not provide insight into the fund’s liquidity. Liquidity discussions should focus on the ability to get in and out as close as possible to the true price of the fund (NAV price). That ability has little to do with average daily volume or assets in the fund and much more to do with the underlying basket of securities in the fund. If the underlying is liquid, your fund should be too.
One more thing – if the current spread is wider than you would like, don’t buy or sell…pick up the phone and call the issuer!
WisdomTree posted an amazing article relating to ETF liquidity that drives home these points. I have highlighted a couple quotes below and linked the full article at the bottom of this note and HERE.
“On September 28, 2016, more than $139 million of an approximate $157 million Fund was sold in one execution. The next day, a redemption order was placed and the WisdomTree Australia & New Zealand Debt Fund (AUNZ) lost about 88% of its assets without any adverse effects. What I want to highlight is the seamless nature of the transaction and the ETF structure’s ability to be unaffected by it. This sale of shares should be celebrated and used as an example to further educate the industry on the benefits of the ETF structure itself.”
“This in-kind mechanism has a number of benefits to the other ETF holders. First, the transaction costs for every creation/redemption are borne by the AP and ultimately the one investor initiating the transaction. In the world of mutual funds, the portfolio managers buy and sell all the securities, and all of those transaction costs erode the NAV of the mutual fund every time any investor enters and exits. Second, the in-kind nature of the transaction allows the ETF to be more tax efficient and, via in-kind redemptions,capital gains in the ETF can be pushed out, minimizing the tax burden for the remaining investors. In this instance, one large investor was able to exit the Fund without causing undue costs or tax burdens to remaining investors. Third, in a traditional mutual fund expense structure, “other expenses” are paid by the fund to third parties for custody, accounting, administration and printing. The relative size of those other expenses increase as the asset size of the mutual fund decreases. However, for nearly all ETFs, including AUNZ, the investment advisor (WisdomTree, in this case) pays these “other expenses” out of its advisory fee. Hence, there is no additional risk of increasing expenses to ETF investors.”