ETF Trends
ETF Trends

Note: This article is courtesy of

By Shundrawn A. Thomas

The short-lived but extraordinary market volatility of last August saw an unprecedented number of flash crashes or halts to trading due to technical glitches, that caused order pileups.

Dozens of exchange traded funds (ETFs) traded well below fair market value as orders went unfilled and, consequently, fair value pricing simply could not be updated due to lack of current information.

There seems to be a certain amount of continuing fear among ETF investors and their advisors that an ETF’s market price may not adequately reflect the total liquidity of the underlying portfolio. We believe such fear is largely unfounded, especially for long-term investors.


Nevertheless, understanding how ETF liquidity is determined and how it can affect trading practice is important for investors looking to maximize returns. Assessing the liquidity of a particular ETF requires a good understanding of how ETF trading works and how to achieve “best execution” when trading ETFs.

First, it’s critical to understand that ETFs trade quite differently than stocks and other investments. The reason is that the intrinsic value of an ETF reflects the value of its underlying securities. Further, ETFs actually have three sources of liquidity, and each can affect trading strategy for a specific ETF, depending on market conditions.

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