Recent questions about ETF liquidity and how the financial products behave in volatile markets show that the industry needs to reach out more on educating investors and financial advisors.
For example, nearly two-thirds of ETF firms said the lack of understanding on liquidity is a major challenge to the continued growth of ETFs, Investment News reports, citing a survey from Cerulli Associates.
The liquidity of an ETF isn’t based solely on the fund’s trading volume. It also depends on the liquidity of the underlying asset class.
The recent turmoil in bond markets on Federal Reserve tapering speculation has also put the spotlight on ETF premiums and discounts, or when the funds trade away from net asset value. [About Those Bond ETF ‘Discounts’]
“Market volatility can have an impact on all investment products, but in this case many investors seemed to question why an ETF’s market price deviated from its stated net asset value,” says Jim Rowley, senior investment analyst in Vanguard Investment Strategy Group. [Vanguard: ETF Premiums, Discounts and Volatility]