Size Does Matter (To a Point): Study of ETF Liquidity

Michael Johnston — Thu, 11 Jun 2009 07:00:36 +0000

As the ETF industry has exploded on to the scene in recent years, sponsors have aggressively launched funds in an attempt to gain market share. While many of these new ETFs have attracted sufficient investor funds to justify continued operation, some have failed to garner a level of investment necessary to support an active, liquid market and been shuttered. And then there are those that remain in business but are cited as having “insufficient liquidity.” Although there are certain rules of thumb – assets under management (AUM) of $25 million and daily volume of 25,000 are often cited as “liquidity thresholds” – there is no hard evidence to support these guidelines. In an effort to determine where illiquidity ends and an active market begins, I analyzed the impact of size and daily volume on the liquidity of various ETFs. To start, I divided ETFs into six baskets based on three-month average daily [...]

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Size Does Matter (To a Point): Study of ETF Liquidity

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