ETF Liquidity, Trading and Market Making | ETF Trends

Some investors may be reluctant to trade exchange traded funds that are thinly trade. However, an ETF’s true measure of liquidity is taken from its underlying components, and investors who are trying to push large block trades can consider alternative liquidity providers to better execute trades.

Asset managers who are thinking about putting their own strategy to work in an ETF wrapper but are wary about liquidity concerns can attend the upcoming ETF Bootcamp conference event that is slated for September 29 and 30 in New York City. [Asset Managers Take a Crash Course in ETF Industry]

Advisors, institutions and retail investors have had certain notions of executing an optimal trade based on the perceived liquidity of a specific ETF. For instance, in regard to issues of liquidity, what has been used to determine a stock’s liquidity can’t be applied to ETFs.

A better interpretation of liquidity in ETFs would be to look at an ETF’s average trading volume and the average daily trading volume of underlying securities. ETF liquidity is based on everything that is inside the index or basket that the ETFs track since the funds are also shareholders of their underlying stock components.

Typically, when advisors see light volume, the area is red-flagged to avoid it. Consequently, a broad swathe of ETF options may be needlessly overlooked by many due to misconstrued concerns.