My original blog (ETF Capital Markets Corner) has been around since 2016. For those who have been reading from the very beginning, you are very aware of the amount of ink spent discussing and debating some of the misconceptions regarding exchange-traded fund (ETF) liquidity. I would like to think that this audience—and investors more broadly—are now more comfortable trading newer funds, irrespective of their size or trading volume.
One of the points I made when highlighting the flaws of using average volume as a liquidity metric was that ETF net asset value (NAV) trades do NOT count in the official volume calculations. (See my prior posts, When Volume Doesn’t Tell the Whole Story and Revisiting (Again!) the Problems of ETF Volume). Not only does trading volume ignore how much the underlying basket of the ETF trades, but it also ignores a potentially large pool of block trades executed in the NAV markets.
Missing from those posts was a broader discussion on the NAV trades themselves. This is a topic that is starting to get a bit more attention, especially now that mutual funds have begun converting to ETFs and those mutual fund investors are accustomed to trading at NAV.
Before I dive into the different flavors of ETF NAV trading, let’s first review the reasons investors love ETFs (and why mutual funds are being converted to them). I think these are my top four:
- Tax efficiency
- Low costs
- Daily transparency
- Intraday trading
For the first two reasons, other things being equal, you most certainly would prefer your investment be tax efficient and low cost than tax inefficient and expensive. For the last two, there is a real possibility that you shrug your shoulders at one or both. For daily transparency, I am sure there are plenty of investors who are not checking the portfolio holdings every single day. For many long-term investors, the value of intraday trading is minimal at best.
We can apply that last point to mutual fund investors, especially those who might be entering the ETF world for the first time. Mutual fund investors are not concerned with intraday trading because that is not how they work! We often say that ETFs are like mutual funds except you have the option to trade at any point during the day. But no one says you need to exercise that option.