Another day, another glut of new ETFs on the market. While there has been a correct emphasis on fees and tax effects- arguably the only two factors an investor can control-investors should also be award of liquidity risk. Liquidity risk describes the situation where a seller of an asset cannot sell it because there are not enough or any buyers. The result is that the seller cannot sell to minimize losses or to profit from paper gains.

Securities are theoretically supposed to be highly liquid due to the fact the stock market is  a meeting place of buyers and sellers. However, some publicly traded securities simply cannot be moved quickly. One such situation happened during the credit crisis when it is difficult to sell stocks in certain companies. More commonly, stocks can become illiquid simply because theres not enough daily trading.

Take, for example, the growing selection of dividend ETFs. Each has their own unique features. Picking one goes beyond the weighting of the ETF or their MER. Look at the trading volume of the following dividend ETFs as of November 15, 2011.

XDV-T: 52,719

CDZ-T: 56,752

XEI-T: 8, 234

ZDV-T- 1,200

PDC-T: 6,100

What is interesting to note is that ZDV-T, BMOs Canadian Dividend ETF, has the lowest MER and arguably the greatest distribution reach as a bank issued product. However, the daily trading volumes are not sufficient for an investor to buy or sell the product. By only looking at MER, an investor may not be aware of the fact that they may own a product that is difficult to sell.

The lesson being the  lowest fees are not always the end all and be all in looking at ETFs.

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