Liquidity is usually measured by the daily trade volume, which is generally expressed as the number of shares traded per day. Thinly traded securities are illiquid and have higher spreads and volatility. When there is little interest and low trading volume, the spread increases, causing the buyer to pay a price premium and forcing the seller into a price discount in order to get the security sold. ETFs, for the most part, are immune to this. ETF liquidity is not related to its daily trading volume, but rather to the liquidity of the stocks included in the index.

Broad-based index ETFs with significant assets and trading volume have liquidity. For narrow ETF categories, or even country-specific products that have relatively small amounts of assets and are thinly traded, ETF liquidity could dry up in severe market conditions, so you may wish to steer clear of ETFs that track thinly traded markets or have very few underlying securities or small market caps in the respective index.

Related Reading:



Taxes

Related Articles
  1. Investing

    The Top 7 ETFs For Day Trading

    ETFs that offer cost efficiency with high liquidity are ideal for day trading. Here are some of the top ETFs for day trading.
  2. Financial Advisor

    Are ETFs Liquid Enough for a Bear Market Exodus?

    Are ETFs liquid enough for a mass exodus that could come with the next major market downturn?
  3. Investing

    5 ETFs Flaws You Shouldn't Overlook

    Despite their popularity, exchange traded funds have some drawbacks that investors should know about.
  4. Investing

    5 Signs It's Time to Dump Your ETF

    You’ve bought into your favorite ETF, and it's been a great ride. When should you exit? Here are the top signals to exit an ETF position.
  5. Managing Wealth

    The Dynamics of Liquidity and Investing

    Liquidity is a hot topic in financial markets these days, so first we’ll explore what we mean by “liquidity” and then what it means when it comes to ETFs.
  6. Investing

    4 Ways to Evaluate ETFs Before Buying

    Learn four areas in which to evaluate an ETF investment to be sure that the investor has a clear understanding of the security being purchased.
  7. Investing

    What Is An ETF?

    Exchange-traded funds, or ETFs, are some of the most popular investment products on the market today, despite having been with us for only about 20 years. ETFs have succeeded because they offer ...
  8. Financial Advisor

    Advising FAs: Explaining ETFs to a Client

    Exchange traded funds (ETFs) have exploded in popularity with both investors and professionals for several reasons, and their growth shows no sign of slowing.
  9. Investing

    3 Ways to Avoid High ETF Fees

    Interested in trading ETFs? Here are three ways to avoid unnecessary fees.
  10. Investing

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center