Tradability in an ETF is a key metric in determining how well it does its job for the investor. The ability to get in and out intraday is one of the defining features of the exchange-traded wrapper, but there are several ETFs in the market that struggle with execution due to poor liquidity and low asset volume.
Poor tradability is best seen in average trading spreads—the wider the spread, the more it actually costs an investor to own a fund, and the more careful an investor has to be with order placement.
The three ETFs with the widest trading spreads today, excluding ETNs, are:
- Market Vectors MSCI Emerging Markets Quality (QEM | F-75) – average trading spread of 7.23 percent; total assets: $10.1 million
- KraneShares CSI New China (KFYP | D-24) – average trading spread of 6.92 percent; total assets: $3.3 million
- Falah Russell-IdealRatings US Large Cap (FIA | D-88) – average trading spread of 5.88 percent; total assets $1.3 million
Lack of tradability isn’t necessarily linked to performance, although the performance chart below shows in its long-straight lines just how little these funds trade:
Chart courtesy of Stockcharts.com
“Funds like this suffer because of the Catch-22 of tradability,” Dave Nadig, head of ETFs for FactSet, told ETF.com, noting that the vicious cycle of illiquidity goes something like this: “Nobody really wants these funds as evidenced by assets under management, so nobody trades them. Nobody trades them, so authorized participants and market makers basically ignore them. Since the market makers ignore them, they insert what are essentially stub quotes, so they advertise enormously wide. Because they advertise wide, nobody wants to trade them.”
“The only way this cycle is broken is generally when some ‘event’ makes them ‘hot’ and investor interest picks up,” Nadig added.