In part one of our series answering the most popular and more complex ETF questions, we discussed ETF fees and cost considerations, as well as the ETF creation/redemption mechanism and the ways that ETFs are tax efficient.
In this second and final part of the series, we delve into more questions that are rarely answered by ETF providers and look at how ETFs perform in periods of volatility, trading volumes and research resources.
Can you sell an ETF if the market crashes?
This is another way of asking about what the industry refers to as liquidity. Liquidity can be defined as how easily and cost efficiently assets can be bought and sold.
Looking back at prior market disruptions like October 2008 or March 2020, ETF liquidity proved to be quite resilient. For instance, in March 2020 the pandemic brought a market crash of historic proportions, with even corporate bonds and US Treasury bonds declining in price and/or having liquidity issues.
Bond ETFs reflected the price declines of the bonds they held. However, while the underlying bonds traded sparsely, with wider spreads (and sometimes didn’t trade at all), bond ETF trading volumes increased significantly.
Therefore, if you were to hold a basket of these bonds during that period, it would have been extremely difficult to sell them, and the spread cost to do so would probably have been steep. Meanwhile, bond ETFs continued to trade, despite the significantly higher volume than usual, providing investors with much needed liquidity, access and transparency in an otherwise distressed and opaque market.
Do you see any issue with an ETF with low net assets and low trading volume?
It really depends how the ETF will be used (you can refer to the chart in part one of this blog series to identify which metrics are most important when selecting an ETF).
An ETF with low net assets could simply mean that it’s a newer product and that you are simply an early adopter. It could also be that the ETF offers a very niche position (therefore with a limited demand), which is probably something the ETF issuer was aware of when launching it. In this case, you probably wouldn’t find many alternatives in the marketplace. There could be a perfectly valid reason why an ETF has low net assets, in which case this would not be an issue.
As for low trading volume, there is often a misconception that volume and liquidity are the same thing. However, the liquidity of an ETF is best represented by the liquidity of its underlying assets. Trading volume (secondary market activity) is simply an extra layer of liquidity but does not necessarily equal better liquidity.
Here is an example: consider an ETF offering exposure to global infrastructure companies. There could be several reasons why this ETF has a low trading volume. One of these reasons could be that investors buy a strategic allocation to this ETF and hold onto it over the long term. In this case, there wouldn’t be a lot of trading in and out of this ETF, and so its volume could appear low. However, it would still be very easy to buy or sell, because the ETF’s underlying stocks are trading constantly and are therefore very liquid.
Liquidity in the underlying securities will provide the support an investor needs to be able to buy or sell easily. Of course, trading volume shouldn’t be disregarded entirely, depending on how the ETF is used, but this metric is often given more importance than it deserves.
How important is it for an ETF to trade?
Once again, it will depend on how the ETF is used in the portfolio. If the goal is to tactically buy and sell regularly, then an ETF with a higher trading volume might be a better option. Spreads tend to be tighter on higher trading volume securities, so spread costs will ultimately add up. Therefore, if your strategy involves more trading, you will incur these costs more often, and so it’s better to minimize them.
If, on the other hand, you expect to hold onto the ETF over the long term, then trading volume and spread costs should be a secondary concern.
As we mentioned, an ETF’s liquidity will ultimately depend on the liquidity of its underlying assets. For example, under normal market conditions, you should be able to easily buy and sell a US large cap equity ETF, regardless of its trading volume.
What free resources are there to compare and research ETFs?
Today’s investors have access to many useful free resources that can provide either real-time or slightly delayed data to help them make better-informed investment decisions. While investment websites like Google Finance or Yahoo Finance are, on the whole, excellent resources, ETFs will often have incomplete or zero data on these websites. We often see ETFs traded on the NEO Exchange, for example, that have no data on Google Finance.
To further help in your ETF research, there are several other useful resources you can tap into:
- The ETF fund page on the provider’s website, which includes the end-of-day NAV price, management fee, holdings and more. For an example, see the Mackenzie Growth Allocation ETF page.
- The NEO Exchange ETF Screener page
- The TMX ETF Screener page
Find out more about ETFs and Mackenzie’s wide range of ETF options: investors, please contact your advisor; advisors, please talk to your Mackenzie Sales Team.
Commissions, management fees, brokerage fees and expenses all may be associated with Exchange Traded Funds. Please read the prospectus before investing. Exchange Traded Funds are not guaranteed, their values change frequently and past performance may not be repeated. The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of May 31, 2022. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.