It tells us that when speculators drive volumes up—such as they did in the heady days of June this year, ETFs are overwhelmingly their tool of choice. On this year’s peak volume days of more than 13 billion shares, ETFs peaked at 34 percent of value traded. Just a few weeks later, in the summer doldrums we’re in now, ETF share-of-trading has plummeted to just 17 percent of value traded.
Put another way, when the markets get boring, ETFs get really, really boring. And here’s where the red flags should start going up.
How has this affected specific ETFs? Here are a few test-case ETFs I use for analyzing liquidity—some of these will look familiar. First off, let’s start with the ETF industry’s poster child, the SPDR S&P 500 ETF (NYSEArca: SPY).
As you’d expect, volumes are down, and below even the recent averages, but at 107 million shares trading every day, it’s still one of the most—if not the most—liquid security in the world. SPY will continue to trade a penny wide and at fair value until long after I’m dead and buried.
What about just a bit further down the liquidity curve? I often look at the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM), because it’s in a fairly illiquid corner of the market, but one that investors seem to maintain interest in:
Here you can start to see some chinks in the armor of on-screen liquidity.