Ready to Dive Into ETFs? Read This Q&A Before Taking the Leap

By JPMorgan Asset Management’s Capital Markets Desk via

In line with evolving client needs is the growth and evolution of investment vehicles available to advisors. ETFs have been steadily gaining in popularity ever since they were introduced more than two decades ago, bringing a few key benefits to the market place including lower prices, tax efficiencies, and liquidity advantages. It’s no wonder ETFs are projected to triple in the next five years.

Of course, that doesn’t mean ETFs are right for everyone or every situation. Before diving into these waters, it’s wise for advisors to understand the liquidity and trading mechanics of ETFs to leverage this tool as effectively as possible within your portfolios. Whether you’re new to ETFs or have never quite gotten a handle on the details, here are five basic questions—and clear, understandable answers—to help get you started:

Q: ETFs are considered more liquid than stocks, but why?

A: When trading individual stocks, liquidity is determined by trading volume in the secondary market. For ETFs, however, liquidity is based not on a single stock, but on the liquidity of all of the fund’s underlying holdings. While it’s not intuitive, that means that small or thinly traded ETFs can actually be highly liquid instruments.

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