Liquidity and ETFs (discusses ADRU)

This is an article from Forbes.com about ETFs by Chana Schoenberger, writes Roger Nusbaum. The article touches on a couple of lower volume ETFs and how a lack of volume can be a reason to stay away. There is a quote from Marilyn Capelli Dimitroff, president of Capelli Financial Services who say she prefers bigger indices to smaller ones. She used the word indices but judging by the tone of the article I think she meant ETFs. Even if the she did not the article warned about liquidity which I will address.

Ms. Dimitroff manages $200 million. It would be very difficult for her to add 4% weight in a thinly traded ETF like the BLDRs Europe 100 (ADRU) that was mentioned in the article. According to the article ADRU trades 8000 shares per day. 4% of $200 million is $8 million which would work out to 114,000 shares. So is the article is right about this, where large IMs are concerned? Actually not quite. According to the prospectus for ADRU shares can be created or redeemed in 50,000 share blocks through the fund sponsor. It is perfectly valid to not want ADRU but I don't think liquidity by itself is a reason for IMs to automatically dismiss a given ETF.

But even if an IM can not overcome the liquidity issue, you can. Lets say an investor with a $1 million portfolio wants to own only one ETF for non emerging foreign, wants that ETF to have a 20% weight in the portfolio and has decided (for whatever reason) that ADRU is the best way to go. $200,000 works out to 2850 shares. More often than not a limit order and a little patience will get the order done. Although you may not even need that. According to David at Schwab the size showing on either side of the quote at many points throughout the day was 10,000-20,000 shares, making 2850 shares seem easy to execute. In general terms the fund sponsors want their funds to be easy to trade. Even so, I would still use a limit order for any orders of size.

To be clear this is not a recommendation for ADRU or to put $200,000 into one ETF but some folks may want to have this type of position.

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