ETFessentials - Trading Characteristics

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Trading Characteristics ETF LIQUIDITY	ETF Liquidity PDF

Exchange traded funds (ETFs) offer investors many advantages, including the ability to trade like stocks. Because of these similarities, some investors mistakenly assume that, like stocks, an ETF’s liquidity is dependent on its daily trading volume. The reality is, however, the liquidity of an ETF is
primarily based on the liquidity of the stocks that make up the ETF, not by the activity in the ETF itself.

For liquidity: look inside.
An ETF’s underlying stocks have the greatest impact on its liquidity. If the underlying holdings are widely traded, their trading costs are less expensive because there are enough buyers and sellers to narrow the spreads. As a result, the ETF is very liquid. Conversely, if the underlying stocks are thinly traded, they are more expensive to obtain—the spreads are wider and the ETF is less liquid. This point about liquidity is important.

ETFs are subject to risks similar to those of stocks and may not be suitable for all investors. Investment returns and principal value will fluctuate so that when shares are redeemed, they may be worth more or less than original cost.

Securities are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.

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