David Mann (pictured), Head of Capital Markets, Global ETFs at Franklin Templeton has been contemplating the hybrid nature of ETFs and the importance of considering trading volume when selecting them. Investors traditionally take into account ETF trading volume when they are selecting an ETF, he says, but these days investors might be trading over different time frames.
Mann says: “The question is ‘how much worth should an investor place on trading volume when selecting a particular ETF?’ ‘What am I trying to accomplish with my selection?’. The trading should become less important in terms of the total picture of the costs and portfolio construction if I am holding on to it for the long-term.”
Mann believes that the conversation should always be had as to whether there is liquidity in an ETF but as holding time increases, the benefit of a highly liquid ETF goes away.
Mann comments that from what has been seen thus far in 2021, investors like to ‘day-trade’ stocks, and that includes ETFs as well.
He says that there are now well over 2,500 ETFs in the US, many of which provide very niche exposures, some with leverage.
“Investors who trade in and out of these funds can have holding times measured in days, and when trading that frequently, the average daily volume of that ETF certainly matters,” Mann says.
“But as the holding time becomes longer, the ETF’s average volume becomes less and less important since there is so little trading involved with this investment. Trading-related questions should fade, replaced with those on the fund itself. For example, when comparing passive funds of similar exposures, are there lower fee options available given the impact of higher management fees over the long term? When comparing active funds to passive funds, what is the active philosophy that merits investment over the passive equivalent?”