ETF Liquidity

Adam Stewart

11 February 2020


ETFs trade like stocks with market makers posting quotes on various exchanges. Much like stocks, ETFs can be bought or sold throughout the day. Many investors express concern over perceived illiquidity of smaller or newer ETFs. They see an ETF that might have volume of only a few thousand shares per day and trade with extremely wide spreads. A major difference in trading stocks and ETFs is the create/redeem process. 

Trading ETFs in size can be facilitated through this process, negating concerns of on-screen liquidity. An ETF sponsor’s capital markets team can also work with market makers in order to narrow spreads for known large order flow.  

Liquidity concerns should be more focused on the liquidity of the underlying holdings in an ETF versus the liquidity of the ETF itself. For illiquid ETFs that hold liquid securities, larger share quantities can be traded through the create/redeem process. Trading in size in ETFs, it’s the liquidity in the underlying holdings that is most relevant as opposed to the liquidity of the ETF itself. Make sure to reach out to the ETF sponsor’s capital markets team for help navigating these unique benefits.


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The assertions and statements in this blog post are based on the opinions of the author and Liquid Strategies. The examples cited in this paper are based on hypothetical situations and should only be considered as examples of potential trading strategies. They do not take into consideration the impact that certain economic or market factors have on the decision making process. Past performance is no indication of future results. Inherent in any investment is the potential for loss. 

Adam Stewart

Adam co-founded Liquid Strategies in 2013 and serves as Portfolio Manager and Director of Trading for Overlay Shares.