ETF Education: Understanding ETF Liquidity

Core Insights - The article emphasizes the distinction between primary and secondary liquidity in ETFs, highlighting that liquidity assessments for ETFs require a deeper understanding than for individual stocks [2][4][6] Group 1: Liquidity in ETFs - Liquidity for individual stocks is primarily about trading volume and regularity, whereas for ETFs, both primary and secondary liquidity must be considered [1][2] - Secondary market liquidity is determined by the trading volume of existing ETF shares, while primary market liquidity relates to the efficiency of creating or redeeming shares [3][4][6] - The supply of ETF shares is flexible, allowing for the creation or redemption of shares to meet demand changes, which is a unique feature of ETPs [4][5] Group 2: Market Participants - In the secondary market, investors trade existing ETF shares, while in the primary market, authorized participants (APs) manage the supply of shares [5] - The liquidity determinants differ between the two markets; secondary market liquidity is influenced by the value of ETF shares traded, while primary market liquidity is tied to the underlying assets [6][7] Group 3: Trading Strategies - Large trades can bypass illiquid secondary markets by utilizing APs to create new ETF shares, which is beneficial for institutional investors [7] - For most investors, trading occurs in the secondary market, where assessing liquidity involves analyzing average spreads, trading volume, and the relationship between ETF prices and net asset value [8]