View all WisdomTree insights in the ETF Liquidity category.
ETFs are built on a backbone of transparency, while mutual funds are opaque in nature. And although mutual funds trade at NAV, it doesn’t mean the execution cost is free. Michael Barrer explains.
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No matter where an investor is on the spectrum of sophistication when it comes to using ETFs, what is paramount is to recognize that ETF execution affects their total return. Investors spend the majority of time on asset allocation, but when it comes time to execute, it is imperative to know what resources you have to obtain the best pricing possible.
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The ETF structure is one of transparency and equality. The trade on September 28, 2016, when more than $139 million of an approximate $157 million Fund was sold in one execution is a perfect example of how investors are protected in the structure and how there is more to an ETF than its AUM and ADV. 
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Many investors judge ETFs for investment candidacy based just on their on-screen characteristics of assets under management, average daily volume and bid/ask spread. By doing that, they may be ignoring the majority of ETFs out there and potentially missing out on some helpful investment tools.
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As we mark the one-year anniversary of August 24, investors may be asking what has been done since that volatile and chaotic day and if it could happen again. 
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August 24, 2015 marked an influential day in the marketplace when we awoke to extremely volatile global markets. Although not the cause of the issues on 8/24, many ETFs were affected by a collision between market volatility and market structure. One of the key factors in why market participants had difficulty pricing ETFs during the opening minutes of 8/24 centered on a little-known and antiquated rule by the NYSE, called Rule 48. 
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Fixed income ETFs provide the investing world with transparency in an otherwise opaque asset class. However, because of the over-the-counter nature of the fixed income market and the fact that ETFs with fixed income underlying securities were adopted later than their equity-based relatives, there are still myths around the trading and liquidity profiles of these funds.
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Although it is not obvious to the naked eye, there is ample potential for daily liquidity in fixed income ETFs. The key is knowing how to access it by utilizing your trading desk or the capital markets desks at the various issuers. Fixed Income ETFs allow investors to economically gain access to a range of fixed income strategies that they may not have the resources or tools to invest in on a per-bond basis.
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The saying “Don’t judge a book by its cover” can be applied to ETFs when discussing trading volume and liquidity. Oftentimes investors will rule out ETFs because they don’t meet a certain average daily volume threshold. This could eliminate from consideration hundreds of ETFs that could potentially be effective and impactful investment vehicles. 
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When I see headlines along the lines of “Fixed income exchange-traded funds (ETFs) are not liquid and pose a risk to the system!” I can’t help but think, Stop the madness! Fixed income ETFs can actually add liquidity to the overall ecosystem and could potentially protect investors better than traditional investment structures. 
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The markets experienced something new and remarkable on Monday, August 24, 2015. The marketplace didn’t know how to react, but within the hour it learned, recovered and returned to orderly markets. ETFs are not to blame, nor are they immune to volatile events in the broader marketplace. 
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What if I told you that a large $500 million order and a smaller $1.2 million order traded in the same ETF, but one executed around the bid/ask spread and the other drove up the ETF price 84 cents, or almost 5%. Could you guess which trade was responsible for each outcome? The answer may surprise you.
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