ETF Liquidity

ETFs may seem like simple investment products because of their indexed approach. However, because ETFs combine features of mutual funds and individual stocks, their complex inner workings take some time to understand.

Even some financial advisors need to brush up on ETF education, especially when it comes to the funds’ liquidity.

“ETF sponsors view misconceptions surrounding liquidity as the top growth challenge in 2013 as nearly two-thirds (63%) rated it as such,” Alec Papazian, associate director at Cerulli Associates, said in a Financial Planning article. “Liquidity and trading ranked the lowest, suggesting these two topics should remain top of mind for providers when developing educational program.”

According to Cerulli, unfamiliarity with ETF liquidity could unnecessarily cause many advisors to gloss over ETF trades. [ETF Liquidity: Look Beyond Trading Volume]

“There still is quite a misconception that looking at the trading volume of an ETF tells you if it’s liquid or not-the composition of the ETF, the trading volume of the individual securities that make up the ETF, the trading volume of the ETF itself, and the investment environment are also important factors,” Papazian added.

However, a lot of advisors are content with big ticket ETFs, so many simply do not even register ETF liquidity issues.