The appearance of EasyETF commodity-related ETFs at the top of both lists suggests that there may be some rogue data at play in this particular case. But there are nonetheless some interesting observations to make, particularly on the second table.

Three db x-trackers ETFs covering European sovereign debt issues made it into the list of the ETFs with the greatest deterioration in liquidity. While the absolute level of bid-offer spreads is small, and below average, for all three ETFs here—the db x-trackers II iBoxx € Sovereigns Eurozone 1-3 TR Index ETF showed an XLM increase from 3 to 15 b.p., the 3-5 year ETF from 5 to 15 b.p., and the Total Return Index ETF from 7 to 20 b.p.—the change in the spreads may reflect investor concerns over the relative creditworthiness of some European sovereigns. We've seen the credit spreads on some Southern European government debt issuers balloon this year, and this would undoubtedly affect the willingness of investors to hold and trade ETFs that amalgamate euro-denominated debt issues from across the region.

The change in the Lyxor Russia ETF XLM is also noticeable—from 53 basis points in Q1 to 146 b.p. in Q3. Emerging market equity ETFs have had a terrible year, and the price declines have been accompanied by deteriorating liquidity. Russia in particular has been troubled, with the market closing outright at times throughout the year, which has also contributed to wider spreads.

There are many other ETFs from the emerging market sector whose bid-offer spreads have more than doubled over the period.

Interestingly, the db x-trackers DJ STOXX 600 Banks Short ETF makes the top ten of funds with deteriorating liquidity, even though it has been one of the best performers this year, and through no fault of its own. Here we can blame the securities regulators and their short-selling bans for affecting the ETF's bid-offer spread.

Where Do We Go From Here?

All in all, the XETRA report makes interesting reading. With bid-offer spreads for some ETFs running to the hundreds of basis points, they are in many cases a multiple of the total expense ratio, making them highly relevant for investors considering investing in particular sectors.

At the other end of the scale, the most liquid ETFs are very competitive in terms of trading costs, and continue to compare favourably with alternative investment options.

We will review the Q4 figures when they are compiled early in 2009, and it will be interesting to see whether recent attempts to prop up the financial sector have had the desired effect. Certainly, one can expect a further widening of bid-offer spreads in the data for October. Will the more recent improvement in credit market sentiment, and the last weeks' cuts in official interest rates, manage to reverse the overall trend of worsening liquidity?

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