Tricks of the ETF Trade

Ian Salisbury reviews the lessons learned from investing with exchange traded funds in the WSJ article The Tricks of the ETF Trade.

Salisbury points out that investors need to look at things like volume, bid-ask spreads, premiums-discounts, indicative intraday value (IIV), limit vs. market orders and trading time of day.

For example, Salisburby notes that amid the bond-market turmoil in October, iShares Lehman Aggregate Bond Fund (AGG), a broad, supposedly liquid ETF that tracks the whole bond market, closed 8.9% below the value of its holdings one day.

Another example is in the case where heavy volume benefits small investors. Comparing State Street’s SPDR S&P 500 ETF (SPY) with the iShares S&P 500 Index Fund (IVV), Salisbury writes that with the SPDR fund, which trades about 435 million shares a day, investors pay a spread of about a penny a share. With the iShares fund, which trades about eight million shares a day, trading costs are closer to two cents.

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