So I finally got off my fat arse and updated the ETF table I produced a week or so ago. This time I added, last price, daily turnover and dollar liquidity. To calculate daily liquidity I simply multiplied the last price by the average 3 months volume as defined by Yahoo. This gives a fairly simple measure of what could be called water under the keel. As expected a handful of ETF’s make up most of the available trade in these instruments, this should not be surprising since this is a function of most distributions. Outside of our own poor decision making the largest risk in ETF’s remains liquidity risk. this risk is two fold. Firstly, you may be able to get into an ETF but in a moment of crisis you might not be able to get out. Looking at the actual dollar turnover will help here. The second arm to liquidity risk is that an ETF is simply too small to carry on – it is not worth being in business and this decision to shut up shop creates all sorts of problems for investors.
ETF’s are like any other tool, they have their uses and they have their drawbacks. They are by no means a magic panacea for any and all trading ill’s