Portfolio Liquidity and ETFs

In a recent Wall Street Journal article, Martin Zweig posited that ETFs, often dirt-cheap to own, can still be costly to buy and sell.  Mr. Zweig cites a study by Antti Petajisto, a portfolio manager at LMR Partners, a London based hedge fund, who looked at about 1,800 ETFs from 2007 to 2014 and concluded that market prices can materially diverge from net asset values during periods of high market volatility.

While Mr. Petajisto’s research may have relevance for many small ETFs with relatively illiquid assets, the big, popular funds such as iShares Core U. S. Aggregate Bond, SPDR S&P 500 and Vanguard Total Stock Market ETF, to name a few, normally trade within a few hundredths of a percentage point of their underlying value.

The message for investors is this:  Illiquid securities are illiquid, whether owned individually, or as part of a portfolio.  Portfolios, whether actively managed or passively, are essentially as liquid as their underlying assets.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®