ETF Volume Spikes Don’t Indicate Direction

July 02, 2014


Well, hello there. Turns out Iron Mountain, the largest holding in RGI, had a major announcement—they’re converting to a REIT structure, which means the firm will make big special dividend payments, and which lifted a huge veil of uncertainty over the company’s prospects.

Is that “responsible” for the spike in RGI? Obviously not. But did it make a bunch of folks start paying attention to RGI? Possibly. It’s a bit of a reach though—after all, IRM is just a 1.6 percent holding in the equal-weighted RGI, and few of the other stocks in the portfolio have any particularly interesting story.

And looking around the space at RGI’s competitors yields a decided lack of interesting fervor. Here’s the space’s giant, the Industrial Sector SPDR (XLI | A-88):


Clearly nothing out of the ordinary here. And a troll around the other funds in the industrials segment yield a similar lack of interest.

So, as pedantic as it sounds, what’s happening here is as simple as “someone wanted in and that drove a spike.” The real story is that the ETF structure absorbed the spike without any fanfare. And that is, frankly, the story we see with volume spikes 99 times out of 100.

Can there be deviations to that norm? Of course. One time out of 100, the ETF volume spike drives the underlying to trade more than it should, but it’s exceptionally rare, and only in the most illiquid corners of the market.

We’ve seen it happen in microcaps, in frontier markets and in locked-up bond segments like high-yield munis and corporate junk. But even in those cases, most of the time, the ETF is the security that behaves well, and it’s the underlying that has issues.

In short, this is where the “exchange-traded” part of ETF shows its stripes, and in general, it’s a beautiful thing.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at [email protected].


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