ETF liquidity matters at times like this

Article Excerpt

Public trading in the $6 trillion world of global ETFs has generally worked well during the extreme turmoil seen in markets during February and March. However, not all ETFs continued to trade as investors would have hoped. Numerous inverse or leveraged funds experienced severe price declines, which resulted in their liquidation. Other smaller funds experienced substantial outflows that led to their eventual closing. Some high-yield corporate bond ETFs with limited underlying liquidity also experienced problems given large sell orders. As a result, they traded well below the value of their assets and produced steep losses for investors looking to dispose of their units. We recommend investors avoid ETFs with too-small asset bases. These funds are particularly at risk of liquidation when markets decline sharply and remain depressed. Also, investors should keep an eye on the liquidity of the underlying assets held in the ETF. Thinly traded equities, and certain corporate bonds or preferred shares with limited trading volumes, can slash an ETF’s asset…