What About Commodities?

So far we have focused on ETFs only, but the Deutsche Boerse/XTF also calculates the XLM liquidity measure for ETCs. For the 47 ETCs they tracked (46 of which are the offerings of ETF securities) during the first quarter of 2008, the simple average bid/offer spread was 93 basis points, more than double the simple average spread of 45 basis points for the ETFs. Looking down the ETF Securities' fund list, only four funds had an average spread of less than 30 basis points: The ETFS Brent Oil, Crude Oil, WTI Oil and Physical Gold ETCs. Perhaps the underlying cost of buying and selling commodities is higher than buying and selling the more liquid equity or bond markets, but this makes frequent trading into and out of these funds a more expensive proposition.

Secondary Listings

Does ETF liquidity vary between primary and secondary listings of the same fund? I raised this question with Paolo Giulianini of UniCredit, the Europe-wide ETF market-makers. According to Giulianini, there may be slight differences in secondary dealing spreads between the different exchange listings of the same ETF, but this is outweighed in importance by the ease of access provided to investors by the practice of cross-listing in different European countries. Nevertheless, to give a full picture of European secondary market ETF liquidity, it would be useful to compare funds across all their relevant listings.

Conclusion

How then would we summarise our findings? On average—and particularly when asset flows and fund sizes are taken into account—secondary market dealing spreads are not a significant problem for investors. European spreads are higher in general than for U.S. funds, but not dramatically so. However, there is a fairly long "tail" of ETFs and ETCs for which spreads are significantly wider. There can also be a surprising difference in secondary market liquidity between different ETFs from different providers covering the same asset class. And lastly, it pays to check the liquidity data provided by the exchanges when choosing an ETF, especially as the data is freely available and covers a substantial part of the market.

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