How liquid are ETFs to move in and out?
I am looking to invest in an S&P 500 ETF and am wondering about its liquidity. Specifically, how easy is it to jump in and out of an ETF? Are there ETFs for the purpose of "parking" your money while the market is down, something that is essentially very low risk (and low gains) should the market start heading down, but then I can jump back into the S&P 500 index as the market rebounds? I don't want to take the money out of ETFs. I know that several S&P 500 ETFs have very low annual costs (i.e. IVV is right around .04%), but what are the typical costs of jumping in and out of different ETFs?
Trying to time the market is very dangerous due to unexpected growth or recessions. However, you can get a "discounted" price from temporary drops if you have an automatic monthly contribution. While an S&P 500 or Index ETF can be a great portfolio addition, it would be prudent to diversify risk with others as well such as growth, value, and international funds. Low-cost and historically high performing funds (no transaction fees and low expense ratios) are selected and rebalanced for you automatically based on your goals and time horizon with a managed portfolio at Betterment.
One of the beauties of investing in ETF's IS their liquidity. They are as liquid as a stock, and a trade executed at 10:05AM will be priced at the market rate at 10:05AM (as opposed to Mutual Funds, which I could sell at 10:05 but which wouldn't settle until the market close at 4P, making the amount realized difficult to determine at the sale). There are a number of "conservative" ETF's out there, such as LQD (iShares Investment Grade Corp Bond) or VCIT (Vanguard Intermediate-Term Bond). LQD has a year to date return of 3.44%, with a .15% expense ratio. VCIT is returning 3.33% YTD, with a .10% expense ratio. The "typical costs" involved would be your transaction fee, wich is running about $7-8/trade through TD Ameritrade.
If your focus is to track the S&P 500 Index, then there are many good options that have low expenses, high volume and liquidity, and you're able to move in and out of them several times a day if you like. That said, I would urge you to avoid day trading as it's expensive and a feeble strategy for building wealth.
You mentioned that you'd like something that is "low risk and low gains", which are not characteristics I'd use to describe the S&P 500. If I'm following correctly, it sounds like your idea is to aim to hold the S&P 500 ETF while the market goes up, get out before it goes down and hold something low risk and low gains, then buy back in to the S&P 500 at market lows. This strategy sounds AMAZING, but implementing it successfully just isn't practical. If you could successfully do this you'd be running a gigantic hedge fund and be reading my response from the deck of your yacht.
Fortunately, you don't have to have a crystal ball. If you're nervous about a market decline in the S&P 500, you can simply "park" (to use your term) some of your capital in the S&P 500 ETF, buy something else that is more stable -or hold cash- and if the market corrects you simply continue holding your existing S&P 500 fund but you have access to capital to buy at lower values.
Clearly there is no one-size-fits-all approach to investing and the comments above should never be considered actionable advice.
As with all of my insight on Investopedia, my comments are general and for informational purposes only. You should certainly discuss any action with your tax and financial advisors before doing anything. If you don't have these professionals please feel free to send me a message and I may be able to provide definitive guidance after getting more information.
Adam Harding, CFP | Investments & Planning
Jumping in and out of any investment is a tough game to play. The best money managers dont beat the market which makes it tough to believe that an individual investor will be able to do better in the long run. I say in the long run because often the investing game is very similar to gambling in that you may get a couple wins and get a boost of confidence only to loose your shirt on the next bet.
With that said here are some answers to your questions.
1) ETFs trade the same as stocks. This means the cost of buying and selling your ETF will be dependent on what your brokerage firm charges for trading a stock. These days this is around $5-10 per transaction. Not a big cost, but if you go in and out a lot, it could really add up.
2) The liquidity issue is really dependent on which ETF you go with. If you select a commonly traded etf such as SPY (SPDR S&P 500 Index) you should have no issues with liquidity. The easiest way to look at liquidity is to look a the average daily volume of the ETF you are looking at. For example SPY has an average volume of 76 million shares. On the other hand the Schwab US Large Cap ETF (SCHX) has an average volume of 656,000. This doesnt necessarily mean its illiquid, but it does have a higher risk of illiquidity.
3) Im not a big fan of "parking" money. It is very difficult to time the market. You should create a portfolio based on when you need money and how much risk you are comfortable with. If you dont need the money for 10 years plus, you can afford to wait out a market downturn. If you need the money next year, its best to not take much risk at all. Build a portfolio that has a good mix of risky assets and less risky ones depending on his time frame issue. This may be something best discussed in detail with an advisor. With that said short term government bonds, money market accounts, or savings accounts are going to be your more secure assets for parking money. Parking more often than not means you are losing money to inflation.
Hope this helps. Feel free to drop me a note if you have further questions. Happy hunting.
Liquidity can vary greatly depending on the ETF. The SP500 ETF's are generally quite liquid. Others such as closed-end funds, a form of ETF, can be less so. There are a number of websites that provide important information about the individual ETF's. ETF Database is one and can be found here: http://etfdb.com/ The website also has a comparison feature that allows for side-by-side comparisons. As for a "parking spot" ETF, you may wish to consider SHY. It is a short-term treasury ETF that pays a small bit of interest. Commissions are also a consideration. Check with your broker/dealer. Some offer commission-free trading for a select set of ETF's. Depending on how often one trades, this could have a real effect on the total costs.