Bid/Ask Spread
The difference between the highest price a buyer is willing to pay for an asset and the lowest price the seller will accept to sell. Bid-ask spreads are a key measure of the liquidity of an asset or security. A limit order—an order to buy or sell a set number of shares at a specified price or better—gives investors some control over the price at which the ETF trade is executed. Although ETFs have many characteristics that are similar to stocks, liquidity is not one of them. Therefore, it‘s important to look beyond trading volumes and on-screen indicators when assessing ETF liquidity. Substantial gaps between the bid (price at which investor wants to buy the ETFs) and ask (price at which an investor wants to sell ETFs) are the most indicative signs of the liquidity of an asset.

The marketplace where securities, commodities, derivatives and other financial tools such as ETFs are traded. Exchanges, such as stock exchanges, allow for fair and orderly trading and efficient circulation of securities prices. Exchanges give firms looking to market publicly listed securities the platform to do this. You can better define ETF liquidity by accessing the liquidity of the underlying securities rather than by monitoring the investors’ activities. ETFs invest across asset classes and track specific indices such as stock, bond, or commodity. The lesser an asset’s investment risk, the more liquid it is, making buying and selling such funds easier.

Investors and traders in any security benefit from greater liquidity—that is, the ability to quickly and efficiently sell an asset for cash. Investors who hold ETFs that are not liquid may have trouble selling them at the price they want or in the time frame necessary. Moreover, if an ETF invests in illiquid shares or uses leverage, the market price of the ETF may fall dramatically below the fund’s net asset value (NAV).

Primary Market
The market where Authorized Participants (APs) create and redeem ETF shares in-kind, typically in blocks of 50,000 shares, which are known as creation units. In order to assess the liquidity of an ETF (that is, how readily you can buy or sell shares of the ETF), you have to look at and assess the liquidity of the assets held by the ETF. Shares of any ETF are bought and sold at market prices (not NAV) and are not individually redeemed from the Fund. The bid-offer spread is the most visible sign of an ETF’s liquidity. Higher spread indicates low liquidity, while the tight gap in the spread means higher liquidity.

Generally speaking, the smaller the spread, the higher the liquidity. As a starting point, an ETF with large trading volume is likely to be liquid. David has had a keen interest in financial markets since he moved with his family to Hong Kong at the age of 13.

Why is ETF liquidity important

The trading volume of an ETF also has a minimal impact on its liquidity. ETFs that invest in stocks in the S&P 500, for instance, are frequently traded, ETF Liquidity Provider which leads to slightly greater liquidity. Low-volume ETFs typically follow small-cap companies that are traded less often and, hence, less liquid.

  • For example, a FTSE 100 ETF will hold all of the composite companies matching the percentage weights in the index.
  • Some investors may trade more due to these lagged swings in hourly prices.
  • Whereas these securities have a fixed supply of shares in circulation, ETFs are open-ended investment vehicles with the ability to issue or withdraw shares on the secondary market according to investor supply and demand.
  • The funds are not required to file a prospectus or registration statement with the SEC, and accordingly, neither is available.
  • However, it is not the ETF structure itself that determines the liquidity of the ETF.

For instance, if you own a double leverage natural gas ETF, a 1% change in the price of natural gas should result in a 2% change in the ETF on a daily basis. However, if a leveraged ETF is held for greater than one day, the overall return from the ETF will vary significantly from the overall return on the underlying security. If you place a market order to sell 1,000 shares, your order will not be filled completely (it may be filled in partial) if there are not enough orders available for you to buy 1,000 shares. If the ETF is not liquid enough, you might end up paying much more than the market price when you buy the ETF. Similarly, you could end up receiving much less than the market price when you sell the ETF. Mutual funds sponsored by Mackenzie Investments are only qualified for sale in the provinces and territories of Canada.

We provide guidance with ETF comparisons, portfolio strategies, portfolio simulations and investment guides. For example, a FTSE 100 ETF will hold all of the composite companies matching the percentage weights in the index. If you want to invest £10m in that ETF, the ETF investment manager needs to be able to buy £10m worth of shares in the companies that make up the index. And, given the extraordinary times that we are living in today, understanding ETF liquidity has never been more important. The spread is the cost of doing business, and it is the difference between the price you would pay to buy an ETF and the amount you would receive if you sold it.

Low-risk securities are in more demand, making them easier to trade. And if the trading volume of an ETF’s core assets is significant, the ETF’s total liquidity rises. The liquidity of most ETFs is measured from their underlying assets because of their unusual creation and redemption procedure. The underlying asset could be stocks, bonds, gold, or other securities. As with any financial security, not all ETFs have the same level of liquidity. An ETF’s liquidity is affected by the securities that it holds, the trading volume of the securities that it holds, the trading volume of the ETF itself, and, finally, the investment environment.

You should carefully consider the investment objectives, risks, charges and expenses of the Matthews Asia Funds before making an investment decision. A prospectus or summary prospectus with this and other information about the Funds may be obtained by visiting In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific industry, sector or geographic location. Pandemics and other public health emergencies can result in market volatility and disruption.Fund holdings are subject to change and risk.

Although bonds are less riskier than stocks, bonds carry liquidity risks since they mature at a particular date and certain bonds have a lock-in period. Hence, since bonds are primarily illiquid, your bond ETF will also be less liquid. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.

Why is ETF liquidity important

From Sectors and Smart Beta to Fixed Income, SPDR Exchange Traded Funds (ETFs) give you wide access to diverse investment opportunities. Comparatively, an ETF that invests in a basket of high-yield bonds, will be as liquid as those bonds. Therefore, the ETF will have a liquidity profile matching the FTSE 100 companies’ liquidity. Correspondingly, the ask is the price at which a seller is willing to sell. If you place a limit order to sell an ETF at a specified price, your order becomes the latest ask. If you place a limit order to buy an ETF at a specified price, your order becomes the latest bid.

ETF liquidity is an essential consideration for investors when choosing an ETF. It ensures efficient trading, narrower bid-ask spreads, flexibility, diversification, and effective risk management. By understanding and evaluating the liquidity of an ETF, investors can make informed investment decisions that align with their investment goals and strategies. Liquidity is closely related to bid-ask spreads, which represent the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). When an ETF has high liquidity, bid-ask spreads tend to be narrower, reducing transaction costs for investors.

September 21, 2023

ETF liquidity: what you need to know

Bid/Ask Spread The difference between the highest price a buyer is willing to pay for an asset and the lowest price the seller will accept to […]
July 29, 2022

How To Become a Forex Affiliate

You can also promote your services and connect with potential traders face-to-face. As a hard-working, goal-oriented, and well-rounded person, I always strive to do quality work […]
June 17, 2022

Fundamental Analysis vs Technical Analysis: Know the Real Difference

This includes items such as cash, inventory, machinery, and buildings. The other side of the equation represents the total financing value the company has used to […]