The Importance of ETF Liquidity: State Street

In its example, State Street is equating liquidity with trading volume, which, in turn, impacts bid/ask spreads. The more volume, the narrower the spread, which can be important for investors who trade frequently or at least twice a month. It’s not as important for investors who trade less frequently.

More specifically, without naming names, State Street is comparing its sector ETFs to Vanguard’s. Its technology Select Sector ETF, XLK, for example, has an expense ratio of 13 basis points and an average daily volume of 10.89 million shares over the past 20 trading sessions, according to Nasdaq. Vanguard’s Information Tech ETF, VGT, has a lower expense ratio of 10 basis points but an average trading volume of 630,790 over the same period, according to Nasdaq.

If an investor buys the Vanguard ETF and saves 3 cents, then trades the ETF later on to buying another ETF as a substitute, that investor could lose those savings, breaking even or even paying more, says Todd Rosenbluth, senior director of ETF and Mutual Fund Research at CFRA.

Another example is the State Street’s SPDR S&P 500 ETF Trust, SPY, which has a 9 basis-point expense ratio but higher volume than Vanguard’s S&P 500 ETF, VOO, which charges 3 basis points. During last December’s market slump, the State Street ETF had a much narrower spread than the Vanguard ETF.

VOO – Vanguard S&P 500 ETF

“Trading volume and bid/ask spreads should be part of the due diligence process” when choosing ETFs, according to Bartolini. Asked whether State Street’s initiative is somewhat self-servicing since the firm has been losing market share to other ETF providers, Bartolini noted that State Street is “an ETF authority,” the first firm to launch an ETF and the firm with seven out of the 10 most liquid ETFs, which is why it needs “to educate investors” about liquidity.