A Common Investor Question About Understanding ETF Liquidity

Note: This article is courtesy of Iris.xyz

By Edward A. Rosenberg

As you determine which ETFs best meet your clients’ needs and objectives, bear in mind ETF liquidity and trading. This will help you better maximize opportunities and optimize trades at the best possible price in order to gain potentially higher total returns. A common misconception holds that to get “best execution,” an ETF must possess significant average daily trading volume.

ETFs actually have three levels of liquidity:

  • Secondary market
  • Market depth
  • Primary market

Examining the level of liquidity of a specific ETF will help determine its appropriate trading strategy.

We often hear this question from our investors: Can I trade an ETF with low average daily volume (ADV) or less-liquid underlying holdings without moving the price? The answer requires an advisor to have an understanding of how ETF trading works, including the various levels of ETF liquidity and techniques to help achieve best execution when trading ETFs.

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