StockFetcher Forums · General Discussion · ETF Volume<< >>Post Follow-up
glgene
523 posts
msg #36747
Ignore glgene
7/6/2005 3:31:56 PM

I understand why a single stock, with low volume, can be dangerous to hold if you have a bad day or a couple of bad days in a row.

But I don't understand why a thinly-traded Exchange Traded Fund (ETF) is price-sensitive. An ETF is a basket of many stocks, each of which generates their own volume.

Would someone tell me what I'm missing. Thanks.

GL Gene


alf44
2,025 posts
msg #36774
Ignore alf44
7/7/2005 1:44:30 PM

Here's what you're missing:

First, your premise is somewhat incorrect.

You said: "a thinly-traded Exchange Traded Fund (ETF) is price-sensitive." You seem to draw this conclusion based on liquidity concerns with thinly traded ETFs (ie. low trading volume).

An ETF is a security that is tied to some underlying asset, index or basket of stocks. The share price of an ETF is tied to the Net Asset Value (NAV) of that underlying asset, index or basket of stocks. If at any time the share price of an ETF trades at a premium OR a discount to that NAV of the underlying...rest assured arbitrage players quickly step in and buy or sell accordingly. This activity will ALWAYS keep the share price of the ETF and the NAV of the underlying in line. It is a mechanism that all but insures a fair price for the retail investor.

The daily trading volume of any particular ETF has nothing to do with the "liquidity" of that ETF ! Where it does present a bit of a problem is in the spread between the Bid and the Ask of that "thinly traded" ETF ! Sometimes the Bid/Ask spread of those thinly traded ETFs can be excessive. And that is problem...NOT the "low trading volume."



alf44 :8^)





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