danno

ETF Liquidity - Size Does Matter

Just as important as liquidity is the actual liquidity of the underlying stocks. It doesn't help when they have very low trading volume and big spreads. Moreover, if the issues are tiny, say with floats of under $200 million, then the price can get driven up or crushed during rebalancings or when shares are created/redeemed. This may not show up in the ETF spread, but it certainly shows up in worse pricing for investors. Also if the market maker has to scrounge around for shares of an illiquid stock, then the execution time takes much longer and the possibility of getting front-run by arbs soars.