Is it time to give newer or smaller exchange-traded funds (ETFs) a look? David Mann, our Head of Global ETFs Capital Markets, makes the case as he opines on his favorite subject—liquidity.
Has it really been a year? Normally I would make a comment about how “time flies,” but am pretty sure that is not the case for most folks (including me!). We just hit the one-year anniversary of the market turmoil and madness caused by the global pandemic. I am not sure I even enjoy re-reading my posts about the impact of market uncertainty on ETFs or the strain it can put on the ETF arbitrage mechanism.
Global markets seemed to have calmed down since a year ago, with many once again near their all-time highs. Many of our conversations about ETF liquidity have also returned to normal. Unfortunately, nuanced questions about how an ETF could trade like a closed-end fund under extreme market stress have faded into the background, replaced with the usual “what’s your spread?” and “what’s your average volume?” I am going to save my thoughts around using pure stock metrics for a hybrid stock/fund vehicle for my next post.
I have been thinking a lot about “time” over the past year. This is now the longest amount of time in which I have not seen my parents or siblings. Now that my commuting time has been reduced to zero, I now have more time to exercise. I now spend a lot more time with my family (which I think has been a good thing!).
Time has also been creeping into how I think about ETF liquidity. We recently had a couple instances where there was some (I would like to think) serious interest in one of our smaller funds. In one case, the interest was in one of our low-cost passive funds, and in another it was one of our active fixed income funds. In both cases, they went with a higher volume fund because it was “more liquid.” I am sure many other ETF issuers have experienced something similar.
But I would like to think that “liquidity” is not really the issue. I estimate that half of my 60+ blog posts over the past five years have discussed ETF liquidity in some form. I have a briefcase full of examples of efficient trading in our funds, and am sure many of my capital markets friends at other ETF issuers have the same. There are ETF market makers on standby who would efficiently trade any ETF, irrespective of its volume. I would like to think when it comes to the ETF liquidity education battle, we are making some real progress.