Understanding ETF Liquidity

The most misunderstood function in the entire ETF industry is trading volume. The discussion around trading volume and potential liquidity has hamstrung many clients. The lack of understanding of how trading volume and underlying liquidity relate has been one of the biggest roadblocks to ETF asset growth in a more widely distributed manner across the product set. It has worked to keep ETF assets concentrated in a smaller number of funds. Product use is now expanding as the investing public becomes more educated about how to access products with lower perceived liquidity.

ETF trading volume does not equal ETF liquidity. The trading volume of an ETF is a number that shows, over some time period in the past, how many ...

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