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The ETF industry is experiencing explosive growth, accumulating substantial assets this year amid the surge in the stock market. The current year is on track to be one of the biggest years ever for ETF demand. There is enough liquidity in the ETF world, with most funds trading at extremely high volumes. Volume can be determined by the number of shares traded in a particular period. High trading volume indicates high liquidity, which is a key characteristic of ETFs.
Here's why volume is relevant:
Liquidity: High-volume ETFs are more liquid, meaning they can be bought or sold easily without causing a significant price change. This is important for investors, as it allows them to enter or exit positions without significantly impacting the price.
Bid-Ask Spread: High-volume ETFs typically have narrower bid-ask spreads. The bid-ask spread is the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept. A narrower spread means lower transaction costs for investors.
Price Discovery: High trading volumes can lead to better price discovery, which means the market price of the ETF more accurately reflects its underlying value. This is because, with more trades, there's a higher likelihood that the ETF price will reflect the collective knowledge and sentiment of a larger pool of investors.
Market Impact: If an ETF has a low trading volume, large trades can significantly impact its price. This is less of a concern with high-volume ETFs.
Lower Tracking Error: High trading volumes might help in better tracking of the underlying index, leading to a lower tracking error, especially for index ETFs. This is because the arbitrage mechanism works efficiently when the ETF is actively traded.
Indication of Interest: High trading volume can also be an indication of high interest in a particular market or sector. For example, if an ETF that tracks a specific industry has a high trading volume, it could indicate that many investors are interested in that industry.
Volatility: ETFs with low trading volumes can sometimes be more volatile than those with high volumes. This is because a small number of trades can have a larger impact on the price of the ETF.
That said, we have highlighted 5 ETFs that have seen higher average volumes over the past three months and are thus the top 5 funds in terms of trading volume, per etfdb.com (see: all the Category ETFs here).
Direxion Daily Semiconductor Bull 3x Shares (SOXL) – Average Daily Volume: 199.6 million shares
Direxion Daily Semiconductor Bull 3x Shares targets the semiconductor corner of the technology sector with three times leveraged exposure to the NYSE Semiconductor Index. Direxion Daily Semiconductor Bull 3x Shares has amassed about $12.2 billion in its asset base while charging 72 bps in fees per year (read: 5 Leveraged ETFs Soaring on U.S.-China Trade Truce).
Direxion Daily TSLA Bull 2X Shares (TSLL) – Average Daily Volume: 197.3 million shares
With AUM of $6.8 billion, Direxion Daily TSLA Bull 2X Shares is by far the largest U.S.-listed single-stock ETF on the market. It offers two times (200%) the daily percentage change of the common stock of Tesla, charging 84 bps in annual fees (read: Should You Buy Tesla ETFs Post Q1 Earnings Miss?).
ProShares UltraPro QQQ (TQQQ) – Average Daily Volume: 114.2 million shares
ProShares UltraPro QQQ seeks to deliver three times the return of the daily performance of the NASDAQ-100 Index, charging investors 0.84% in expense ratio. The index measures the performance of the 100 largest domestic and international non-financial companies listed on Nasdaq based on market capitalization. ProShares UltraPro QQQ is the most popular and liquid ETF in the leveraged space, with AUM of $25 billion.
ProShares UltraPro Short QQQ (SQQQ) – Average Daily Volume: 106 million shares
ProShares UltraPro Short QQQ provides three times (3X or 300%) inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. It has AUM of $3.1 billion.
Direxion Daily S&P 500 Bear 3x Shares (SPXS) – Average Daily Volume: 86.3 million shares
Direxion Daily S&P 500 Bear 3x Shares provides three times inverse exposure to the S&P 500 Index and charges 91 bps in annual fees. It has AUM of $408.5 million (read: S&P 500 Makes the Fastest Recovery Since 1982: 5 Best ETFs).