Examining Intraday ETF Liquidity: When Should Investors Trade?

TLDR: In this paper, the authors analyzed the effect of time of day on the average bid/ask spread of an exchange-traded fund (ETF) and found that, both before and after they add controls, average spreads are highest in the early morning.

Abstract: In this article, the authors analyze the effect of time of day on the average bid/ask spread of an exchange-traded fund (ETF). They examine a cross-section of 55,781 intraday spread observations generated by 744 US-domiciled ETFs in 2017, controlling for fund category, trading volume, and issuer. The authors find that, both before and after they add controls, average spreads are highest in the early morning, supporting the argument that investors should avoid trading near market open. Before controls, average spreads are tightest in the late afternoon. After controls, they appear elevated during the final five minutes. However, because volume increases substantially during that period, spreads still appear tighter overall. Therefore, our analysis does not support the argument that investors should avoid trading near market close. Unexpectedly, after controls, the authors find higher spreads during Federal Open Market Committee announcements. This suggests that investors should be vigilant when trading at such times.