Q. Is it true that an ETF's liquidity is not important as its underlying stocks?
A. Wrong.
Many ETFs are thinly traded, this means their bid and ask spreads are wide, unfortunately the wider the spread, the bigger a loss an investor will suffer from buying the ETF.
A wide bid/ask spread of an ETF indicates the inability to arbitrage the price of the ETF to its underlying net asset value (NAV). Why? Because ETFs' shares are created and redeemed through in-kind exchanges to prevent ETFs from trading at a discount or premium to their NAV. Market Makers typically create and redeem ETFs in blocks of 50,000 shares, for thinly traded ETF's, this indicates a problem.
What to do if the ETF you want to buy has wide bid/ask spread?
Use limited orders, just like you do with stocks, by specifying the price point you want to pay for.
A. Wrong.
Many ETFs are thinly traded, this means their bid and ask spreads are wide, unfortunately the wider the spread, the bigger a loss an investor will suffer from buying the ETF.
A wide bid/ask spread of an ETF indicates the inability to arbitrage the price of the ETF to its underlying net asset value (NAV). Why? Because ETFs' shares are created and redeemed through in-kind exchanges to prevent ETFs from trading at a discount or premium to their NAV. Market Makers typically create and redeem ETFs in blocks of 50,000 shares, for thinly traded ETF's, this indicates a problem.
What to do if the ETF you want to buy has wide bid/ask spread?
Use limited orders, just like you do with stocks, by specifying the price point you want to pay for.
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