The ETF universe is quickly expanding with new and innovative strategies, but they aren’t always met with widespread acceptance. Investors interested in new or interesting ETFs should not immediately dismiss them solely based on the lower trading activity or volumes.
“When it comes to reading and interpreting an ETF’s true liquidity, it’s vital that investors look below the surface. So while some pundits suggest that new ETFs always carry elevated risks based solely on their lower average daily trading volume, that’s simply not true. There can be newly issued ETFs with deep liquidity, much of it unseen on a trading screen,” according to a new insights paper by VictoryShares ETFs.
Specifically, ETF investors should understand that average daily volume is not a definitive representation of an ETF’s liquidity.
Graphic courtesy VictoryShares
ETFs are an investment tool that tries to reflect the performance of a benchmark index. Consequently, an ETF’s true liquidity is more related tot he liquidity of the underlying basket of securities. If an ETF exhibits low average volume, it does not mean that it is difficult to trade.
Due to its innate creation and redemption process, ETFs are able to create and redeem shares based on supply and demand through the help of Authorized Participants whom work with ETF issuers and market participants to help provide more efficient or seamless ETF trades.