Are ETFs liquid assets?
Are ETFs considered liquid assets by your standards?
Yes, according to FASB and GAAP accounting practices Exchange Traded Funds are level 1 securities that are readily priced and available for trade on a daily basis. However they still have T+3 clearing date which makes them less liquid than a mutual fund or money market fund which is T+1.
They are considered equities where and both Limit Orders and Stop Orders can be applied. If you are selling to buy other equities then the T+3 rule does not apply [Trade Date + 3 Days to Settle]. However, if you are selling to have cash either transferred to another account OR have a check sent to you then you must adhere to T+3.
A word of caution: Not all ETF's are created equally. Be careful before acquiring ETF's that are held 'in Trust' [predominantly commodity ETF's]. If/when a 'Trust' ETF is sold within an 'after tax' account you will receive a K-1 and taxed at the 'short term' capital gains rate regardless how long you held it. IF held in an IRA, you need not worry.
A liquid asset is some form of asset that is cash or can readily be converted into cash without having to sacrifice or discount the value. In my opinion an asset that trades on an exchange and can be converted into cash for withdrawal is liquid as you know what the value is on a day to day basis. You know the value at the particular time you are thinking about your liquid assets. One caveat is that if you are saving for a short term goal (1 to 24 months) and need a defined amount of liquid assets for something such as a down payment on a home then it would be my advice to convert the ETF's or other exchange traded security to a money market fund to avoid danger of downward fluctuation. In a good financial plan, securities traded on an exchange with a 3 day settlement period would be at the bottom of the list of liquid assets to turn to in an emergency since 1) the value does fluctuate with the market although you know the value when you sell, 2) you have to wait three days for a secuity like an ETF to 'settle' for the funds to be available for withdrawal and 3) you should have cash or other savings that do not fluctuate in value available in some quantity. The bottom line is - investments are certainly part of your liquid assets, even those held in retirement accounts such as IRA's or 401ks. An example of a non-liquid asset would be real estate. Real estate cannot be easily converted into cash.
Yes, most ETFs are very liquid especially one based upon a broad index or large sector like banking, technology etc.. As you get into the subsectors, the total number of shares traded can get light but the "authorized participant" (similar to a market maker in stocks) either redeems or creates new shares. If you are concerned about the the liquidity of an ETFs due to low number of shares traded per day, look at the underlying top 10 positions and see how liquid those stocks or assets are. If they are liquid, you should have no problem.
Hope this helps and best of luck, Dan Stewart CFA®