### Magnitude and Evolution of ETF Trading Frictions

**January 8, 2016** - Volatility Effects

Are exchange-traded funds (ETF) efficient from a trading frictions perspective? In the October 2015 version of their paper entitled “ETF Liquidity”, Ben Marshall, Nhut Nguyen and Nuttawat Visaltanachoti examine magnitude of trading frictions, best liquidity metric, time-variation in liquidity time and liquidity-return relationship across a large number of ETFs. Their universe consists of 870 ETFs: 571 equity (411 U.S. and 160 international), 83 bond, 17 commodity, 19 currency, 25 real estate, and 155 “other” that involve leveraged or short exposures to any asset classes. They employ the Dow Jones Industrial Average ETF (DIA) to relate ETF liquidity to underlying asset liquidity. They consider three trading friction metrics: (1) effective spread (twice the absolute difference between natural logarithms of price and bid-ask midpoint); (3) quoted spread (ask minus bid divided by midpoint); and, (3) price impact (five-minute changes in midpoint). Using tick and daily data for the selected ETFs and DIA components during 1996 through 2014, *they find that:* Keep Reading