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3 Rules For Dealing In Thinly Traded ETFs

Apr. 11, 2018 5:06 PM ETQUS5 Comments
David Fabian profile picture
David Fabian


  • It was once commonly thought that you needed a threshold of average daily volume in order to get solid trading execution.
  • The volume of the ETF doesn’t matter as much as a volume of the underlying holdings.
  • The truly risky funds are those where the ETF is thinly traded and the underlying holdings are esoteric or priced erratically.

I’ll confess that I once fell prey to the stigma that you have to avoid thinly traded ETFs at all costs. They were looked upon like the dark alleys in the seedy part of town. You can go down that road if you must, but you may ultimately regret it in a moment of panic.

It was once commonly thought that you needed a threshold of average daily volume in order to get solid trading execution. Otherwise, you fall prey to thieving market makers who take advantage by blowing out bid/ask spreads on a large order and make you look like a fool.

This was one of my initial concerns when TD Ameritrade switched its non-transaction fee ETF lineup from a bevy of liquid Vanguard funds to a lineup of State Street (STT), WisdomTree, and PowerShares products. Suddenly you are staring at comparable funds, with the caveat they are trading a couple thousand shares/day instead of the millions of shares/day that the largest issuers garner.

Fortunately, there are several ways to overcome this hurdle, and I encourage both large investors and advisors to understand these concepts when dealing in thinly traded ETFs.

1. The volume of the ETF doesn’t matter as much as the volume of the underlying holdings. This was a tough one for me to grasp at first. I thought everything revolved around the price of the fund itself rather than its net asset value. The fact is, if the ETF owns highly liquid securities, it will likely experience solid pricing when you go to buy and sell.

As a real-world example, we just recently purchased a position in the SPDR MSCI USA StrategicFactors ETF (QUS) for clients. It’s a smart beta, multi-factor fund that selects stocks based on quality, value, and low volatility characteristics. Its average daily trading volume is around

This article was written by

David Fabian profile picture
David is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing and implementing actively managed growth and income portfolios using ETFs, CEFs, and mutual funds. Visit our website for more information or to signup for our weekly email updates. Follow me on Stocktwits: http://stocktwits.com/fabiancapital

Analyst’s Disclosure: I am/we are long QUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this blog. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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