Liquidity Review of U.S. Stock, Sector ETFs

There are so many US stock ETFs, it almost makes your head spin trying to keep track of them all.  They have dramatically different levels of trading volume.

If you will be taking positions for the long-term and do not expect to be darting in and out of the market as a trader, then you will probably focus more on expense ratio and whether the fund uses index replication or representative sampling. In that case the Vanguard funds are the best choice, because they have the lowest expense ratios and use index replication or near-replication, instead of sampling.

If you have a very large portfolio with a huge “bite” size, or want maximum assurance of your ability to enter and exit quickly when you wish, you will probably focus more on trading volume.

This chart may be helpful to those with a trading approach or those with a very large “bite” size.

It is organized in outline form as Broad Market > Market-Cap > Style (Growth or Value).

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If you wanted to have the most liquid positions, you could use (VTI) for the broad market, unless you chose (IWV) because of its larger number of covered companies.  You could use (SPY), (MDY) and (IWM) for large-cap, mid-cap and small-cap positions (note the small gap between MDY and IWM universe).  You could use (IWF), (IWD), (IWO) and (IWN) for LC-G, LC-V, SC-G and SC-V.

Sector ETF Liquidity Review

There are more ETF offerings than there are liquid opportunities.  Some ETFs have massive trading volume and minimum Bid/Ask spreads.  Some other ETFs trade irregularly and have expensive Bid/Ask spreads.

Sector funds are useful in conjunction with a broad market fund to emphasize (overweight) sectors of particular interest.  Sector funds can also be useful in an asset allocation program that uses all of the sectors in a rebalancing regimen aimed at capturing value as sector rotation occurs in the market.

The larger your portfolio, and therefore your “bite” size, the more liquid you need a security to be to avoid moving the market on the way in our out, and to assure that you obtain quick execution on your entry and exit.

An investor with a $50 million portfolio has a quite different set of position liquidity needs than an investor with a $50,000 portfolio.

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