ETFs: 'The' Trading Tool

By Matthew Hougan

Jim Wiandt's suggestion that ETFs have become the main proxy for trading the market is dead-on.

The numbers here are startling. It's not just days like Monday when, as Jim mentions, ETFs were three of the top traded securities in the world. It's day in and day out.

Yesterday, for instance, ETFs took four of the top six spots on the most-traded securities list: SPY was #1, followed by Lehman Brothers (NYSE: LEH), the Select Sector SPDR ETF (AMEX: XLF), Washington Mutual (NYSE: WM), the Nasdaq-100 ETF (NasdaqGM: QQQQ) and the iShares Russell 2000 ETF (NYSEArca: IWM).

This phenomenon is growing and it's probably the biggest story in ETFs right now. Eric Rosenbaum just wrote a story on the topic right now, but consider this: Even though ETF assets are essentially flat this year, ETF trading volume is on pace to almost double this year. We've already topped 2007 volume, and it's early September. What's changed? Part of it is the increased volatility in the market, but part is that ETFs are just becoming ingrained as the "go-to" product for traders. I think they're changing the way Wall Street works.

We spend so much time analyzing ETFs from the perspective of long-term asset allocators that we forget that ETFs are, at their core, a trading tool.  They happen to be great for asset allocation, but they were designed for traders and that's still one of their primary uses. 

It's one of the reasons I've been writing so much about trading spreads and ETF liquidity recently; this stuff matters, not just to long-term investors (although it matters there too), but to the huge audience of traders.

Comments

[cristian:]

May be in the future.... right now with a few notable exceptions (5-6 major tickers) ETF comparative volume, that would justify this as a fact, is rather sparse.

2008 Sep 11 07:41 AM