Diving into New ETFs: Three Simple StepsAug 31, 2017

Key Points

New or less-liquid exchange-traded funds (ETFs) carry some special considerations traders and investors need to be cognizant of.

I’ve spent a fair amount of time talking about ETF trading best practices and some of the misconceptions about trading new or less-liquid ETFs. While it’s true that trading less-liquid ETFs shouldn’t raise much concern because an investor can leverage the liquidity in the underlying basket of securities, one must not get too complacent.

There are numerous examples of large trades in less liquid ETFs—often at multiples of the average daily volume—that occur inside of the bid/ask spread. Remember, the bid/ask spread represents the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to take.