ETF Traps For Short-Term Investors

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May 12, 2009 9:28am ETF BASIC NEWS

trap……Thinly Traded Funds. One of the most important things to check before taking a flyer on an ETF is the average daily trading volume. The well-known SPDR, which tracks the S&P 500 index, recently has been trading 280 million shares a day. Buy into the SPDR, and you’ll be able to unload your shares throughout the day with a miniscule bid-ask spread.

Then there are funds like First Trust Global Wind Energy, which goes by the cutesy ticker FAN. It’s bad enough that the fund tucks carbon-belchers like Royal Dutch Shell into its portfolio. It’s also hard to get out of once you buy in. The fund has had average daily volume of 97,000 over the past 10 days, according to Charles Schwab. If the fund’s value drops quickly, there may not be someone willing to buy it from you at a price you think fairly reflects the underlying market.

FAN has lost 65% since its inception, which leaves little surprise as to why some investors have given up on it. But because the shares aren’t actively traded, the bid/ask spread has crept above 1%, meaning you’ll pay a premium to get out.

Other ETFs that have low trading volumes include the SPDR S&P Emerging Markets Small Cap fund, which has daily turnover of only 12,000 shares, and the iShares FTSE NAREIT Ind/Off Capp, an ETF that tracks the industrial and office real estate sector and trades a skinny 5,000 shares a day.

Full Story: http://www.forbes.com/2009/05/11/etf-traps-trader-personal-finance-etfs_print.html



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