Predicting ETF Liquidity

Abstract

A substantial amount is incurred in ETF transaction costs each year. This paper examines the performance of a vector autoregressive (VAR) model and other naïve models to time trades in 1,350 ETFs over the 2011 to 2017 period. We find varied spread savings for large and retail ETF traders by timing trades. A large ETF trader can save 7.40% of ETF spread costs whereas trading at the market closing time would be optimal for a retail ETF trader to reduce spread costs. The spread savings for large ETF traders are diverse across ETF sectors and depend on the spread volatility.

Keywords: ETFs, Liquidity, Bid-Ask Spread, Forecasting

JEL Classification: G11, G23