# ETFs / Volume



## Kaitlyn (May 13, 2011)

Looking to make some ETF purchases tomorrow (for the first time), and looking at this for example:
http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf

VCN, at the very least, appears to have very low trading volume. How can you buy these ETFs without price fluctuations or getting killed on the bid/ask spread?

Furthermore, isn't this also problematic (perhaps moreso!) when you try to sell down the road?


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## cainvest (May 1, 2013)

Kaitlyn said:


> VCN, at the very least, appears to have very low trading volume. How can you buy these ETFs without price fluctuations or getting killed on the bid/ask spread?


If you're a long term investor don't worry about bid/ask spreads.


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## Echo (Apr 1, 2011)

In a nutshell, low trading volume is no cause for concern because ETF shares can be created and redeemed every day (http://www.wsj.com/articles/SB10001424127887323277504578191363832450972). 

Just make sure to use a limit order, rather than a market order, when buying and selling ETFs (http://canadiancouchpotato.com/2014/12/15/the-limits-of-limit-orders/)


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## Kaitlyn (May 13, 2011)

Echo said:


> In a nutshell, low trading volume is no cause for concern because ETF shares can be created and redeemed every day (http://www.wsj.com/articles/SB10001424127887323277504578191363832450972).
> 
> Just make sure to use a limit order, rather than a market order, when buying and selling ETFs (http://canadiancouchpotato.com/2014/12/15/the-limits-of-limit-orders/)


In the example of VAN which I think has under 15k volume - at least today - does that mean I could put in an order for 15,000 shares (for arguments sake) that it would get filled?


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## Echo (Apr 1, 2011)

Yes, it should get filled. Here's a Vanguard analyst talking about trading ETFs:

"The biggest myth might be that the trading volume is the measure of an ETF's liquidity. It's actually a case where an ETF's liquidity is a function of the ETF's trading volume as well as the liquidity of the underlying securities. So, unlike a single security, which has one layer of liquidity, ETFs actually have two layers. One is the trading of the ETF itself. Generally speaking, the greater the trading volume, the tighter the bid-ask spreads.

The second layer comes from the fact that ETFs are open-end funds. They don't have a fixed amount of shares like a single security. Even for an ETF with low trading volume, large orders can be filled because of the creation of new shares or the redemption of existing shares. Typically, the more liquid the underlying securities, the tighter the bid-ask spreads on the ETF. Therefore, we say liquidity does not simply equal volume. Take a look at an ETF's bid-ask spreads as well."


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## Potato (Apr 3, 2009)

For an ETF, if the market maker is doing it's job, then you should be able to put in a marketable limit order and they will create/destroy the shares to fill the order. Then if you wanted to buy/sell 15k units on your own, and everyone else still had the regular 15k of daily volume, it would just be an especially busy day with 30k units traded, no problem. So short answer, yes, it would get filled (but again, use a limit order). 

I tend to a touch of paranoia, so if I had 15k units of an ETF that only traded 15k units/day on average, I would be prepared for the possibility of the market maker letting me down and needing to take a couple of days to get out if for whatever reason I had to liquidate. A general rule of thumb for regular stocks is that you wouldn't want to have to be in a position to move more than ~10% of the volume in a day. So following that, you could for instance break your order up in to ~1.5k chunks (~$45k in value) and spread it out over a few days in the worst case -- but again, the market makers _should _be there to let you trade well above the average volume. There are also limits to how many units can be created for you if you're looking to place truly massive orders: at some point you'll run into liquidity problems with the underlying holdings. 

If you're truly concerned about liquidity in VCN, then you can look at the equivalent iShares product (XIC) which has a higher daily volume.


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## james4beach (Nov 15, 2012)

I disagree with the others. I think volume and bid-ask spread is important because in my experience it determines how efficiently you can get in and out of positions.



> VCN, at the very least, appears to have very low trading volume. How can you buy these ETFs without price fluctuations or getting killed on the bid/ask spread?


If there's a wide bid-ask spread, sure you can still buy it ... but you will have to bid higher than what the fund is worth (you'll bid higher than the NAV). When there's a wide bid/ask spread, there is no way to buy it without getting killed on the spread.

I've seen that you do not get very good fills on thinly traded ETFs. Let's say the bid is 9.94 and ask is 10.00 and the NAV is at the midpoint 9.97. You will likely get no fill unless you bid at 10.00 which means you are bidding higher than the NAV. Right away you've lost money -- immediately.

It's true that internally, all ETFs (that contain liquid securities) are themselves liquid. That's the "second layer" in Echo's post above. But that doesn't really do you much good; YOU are still at whims of the bid-ask spread. The fact that ETF shares are created and redeemed all day does not benefit you for trading in and out of the position.


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## GoldStone (Mar 6, 2011)

james4beach said:


> I disagree with the others. I think volume and bid-ask spread is important because in my experience it determines how efficiently you can *get in and out* of positions.
> 
> ...
> 
> It's true that internally, all ETFs (that contain liquid securities) are themselves liquid. That's the "second layer" in Echo's post above. But that doesn't really do you much good; YOU are still at whims of the bid-ask spread. The fact that ETF shares are created and redeemed all day does not benefit you for *trading in and out* of the position.


I disagree with your disagreement. Your points apply to a trader. They don't apply to a long term, buy-and-hold investor.

All ETFs have a money maker who maintains a fairly narrow spread under the contract with the ETF company. The size of the spread is capped under the contract. Typically, it's NAV plus/minus 1c-2c per share.

You can get an instant fill from the money maker if you pay their Bid or Ask. It's true that they won't fill a trade inside their Bid/Ask. This shouldn't matter to a long term investor.

Re: low daily volume. It's not an issue for the same reason. There is always an ETF money maker on the other size of the trade. The money maker can fill any size you want, as long as you pay their Bid or Ask.


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