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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