ETF Liquidity: It's All About the Basket

By Salvatore Bruno via

As any savvy investor knows, a stock’s liquidity is a crucial consideration in the purchase decision. Most investors prefer the relative comfort of knowing there’ll be a ready market for their shares should they choose to sell. They know that buying illiquid assets can add another layer of risk to an investor’s portfolio, one that needs to be carefully considered and one from which many investors shy away.

But while liquidity is a straightforward concept when comparing one stock to another (the higher the trading volume, the higher the liquidity), that guiding principle doesn’t apply in the world of ETFs. That’s why it’s vital for anyone investing in ETFs to understand how liquidity works in these funds. The most important thing to understand is that ETF liquidity is dictated not by the ADV (average trading volume) of the fund itself, but instead by the “underlying basket” of securities within the fund. And while that concept may feel foreign to anyone new to ETFs, it’s pretty simple once you understand the basics.

Click here to read the full story on