Great to be part of SWS and the investors involved.
I have had the SPA3 software for a considerable amount of time (possibly 10 years) but have not had the nerve/funds to be able to invest without too much worry/fear.
I have recently (September) set up a Core Satellite Portfolio of $50K with 50% invested in ASX:IJH.
My worry is that some days I look at the number of trades/liquidity for IJH and it is very low compared to all other investments.
Does anyone have any real world experience say during the COVID drop having trouble selling IJH at a reasonable price/time frame.
Other ETF’s do not seem to be as low volume.
ASX: IJH is the mid cap ETF of the top 400 in the US. It is low volume (IMO) because if you were going to track that index, it is easier in the US with much higher volumes and not affected daily by currency fluctuations. It looks like the buy/sell pricing is set by the market maker and it is kept in a very tight range where it becomes hard to trade unless you pay the market makers price. If you are just trading the ASX, I should think that STW would be a better index to follow, unless you really want to diversify to the US. Just my view.
ETF’s have multiple pools of liquidity as illustrated in this diagram.
Extra “units” of the ETF can be created from the underlying instrument, in this case shares of the SP400 Mid Cap Index.
Market Makers can create and redeem ETF units on a demand/supply basis and so what is seen “on screen” is not actually a true representation of the availability of the ETF.
Here is a link to a document from Blackrock (in the Education Centre) that does a pretty good job of explaining how ETF’s work, and liquidity is addressed from Page 37 onwards.
The key issues are when placing orders as liquidity improves around our midday when the market makers are more active during the Asian sessions.
We’d suggest the use of limit orders typically if you can’t place your order during those times.
Thanks Phillip I appreciate your insight. Happy Investing,
Thanks David, Nice document attached and only 138 pages. “Education is the key to being better informed”, you can quote me on that one. Regards Duncan
I have a question about trading volumes/liquidity with ETFs as I am interested in trading them. Normally when I buy equities I try to avoid trading low volume thinly traded equities.
I understand that ETFs have “market makers” but I do not understand the implications of this. What I would like to know is should volume of trades be a consideration in trading ETFs? ie if an ETF has very low trade volume could I be stuck with and offer trying to find a buyer or will the market maker make a bid based on the index/strategy that the ETF is following? Does anyone know the answer to this?
I trust you’ve seen David McCulloch’s response above.
Thank you Gary and David,
That was very helpful. I read the Blackrock education document and it was also an excellent explanation.
I have a follow-up question. The document states
" Due to the creation/redemption process, ADV for an ETF is not indicative of total
liquidity. As previously described, on-screen liquidity only tells a piece of the
story; hidden and underlying liquidity would also serve as additional sources that
contribute to the overall liquidity as the ETF matures"
My question is that if ADV is not indicative of the total liquidity how can it be calculated for the purposes of an investment plan or strategy?