Yesterday was Veterans Day. A Federal holiday in the US where we honor those who have served in our country’s military during wartime and peacetime. But it also makes for something a bit strange in the financial markets. If Veterans Day falls on a weekday, the stock market is open while the bond market is closed.

Because we are sensitive to transaction costs and realizing capital gains in our client’s accounts, our investment strategy doesn’t involve a whole lot of trading activity on any given day. However, our strategy does include using ETFs for at least part of the stock and bond allocations. Because ETFs trade on stock exchanges, they are available to trade on days like yesterday, even if the underlying assets of the ETF are bonds.

On a typical day when the stock market and bond market are both open, shares of bond ETFs are trading on stock exchanges while individual bonds are also trading between market participants in the over-the-counter (off exchange) bond market. The two markets work together in the price discovery process – a process that has been proven over the years to be pretty darn efficient. While we trust in the collective wisdom of the market, if a large part of the market takes a holiday, we trust it a little less.

Market data shows that we aren’t the only ones with this feeling. Trading volume for the largest bond ETFs can be as much as 80% below average on days when the stock market is open but the bond market is closed. With an important contributor to market efficiency gone – investors take a step back.

Now that doesn’t mean that we never trade bond ETFs on days like this. Instead, we pay extra attention to factors like price volatility that day, the amount of liquidity that is available and other things like bid/ask spreads. If conditions aren’t right, waiting an extra day is usually ok. And in cases like that, clients are better served if we are patient.