Moneyball: The Art of Analysis in ETF Trading and Liquidity

Baseball opening day has finally arrived, and I cannot wait to get back out to the ballpark. Even my wife has finally come around to the joys of watching the Oakland A’s on a summer weekend afternoon while having a hotdog with an ice cold beer. The kids are always decked out in full gear with baseball gloves on hand to catch any stray foul balls.

Last season was the first time I noticed that some new stats had made their way onto the main scoreboard when a player came up to bat. The old favorites, like batting average and RBIs, were still there but new “advanced stats” were now included in the mix: OPS (On-Base Plus Slugging), WAR (Wins Above Replacement), and BABIP (Batting Average of Balls in Play).

For decades, batting average was the most important stat when determining the offensive prowess of a batter. A .310 hitter was better than a .280 hitter who was better than a .250 hitter—end of story. Only recently (call it the last 20 years) has the baseball world come to appreciate that batting averages ignore a lot of important offensive elements such as walks, speed and power. Those newer metrics do a better job of showing that a .260 power hitter who walks frequently can have more value than a .310 singles hitter who never walks.

But at the same time, knowing that a batter has a .310 average still has real value—in fact, that player is probably an all-star! That’s why batting average is still very popular and is used in conjunction with additional statistics that together can tell a better narrative.

At this point, you’re probably wondering if you’re even reading the right newsletter. Where is the part on ETF trading and liquidity?! I would argue that for the most part, the ETF industry has decided that the most important stat for trading purposes is average volume followed closely by bid/ask spread. And I’ve spent the better part of the last five years writing articles to point out the misconceptions associated with those trading statistics (in fact, average volume was my very first blog post back in 2016).