ETF Liquidity - Fidelity (2024)

FAQs

How to assess ETF liquidity? ›

The primary factors that influence an ETF's liquidity are its composition and the trading volume of the securities that make it up. The secondary factors that influence an ETF's liquidity include its trading volume and the investment environment. Low-volume ETFs do not necessarily have low liquidity.

ETFs have differing liquidity profiles for many reasons. Investing in an ETF with relatively low liquidity may cost you in terms of a wider bid-ask spread, reduced opportunity to trade profitably, and—in extreme cases—an inability to withdraw funds in certain situations like a big market crash.

Arguably, one of the paramount benefits is the liquidity and tradability that ETFs provide, offering investors an efficient trading vehicle for targeted market exposure. Four key players are integral to bringing such liquidity to any ETF transaction. Investors place orders to buy and sell ETFs on the exchanges.

2. Examine an ETF's trading volume. Volume is a good indicator of liquidity and investor interest. If the volume is high and the price is rising, the ETF most likely is liquid and people want to own it.

There are three levels of liquidity to consider for ETFs: on-screen liquidity, broker-assisted liquidity and specialist-accessed liquidity.

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

iShares iBoxx $ High Yield Corporate Bond ETF is the largest and most liquid fund in the high-yield bond space, with AUM of $19 billion and an expense ratio of 0.49%. It offers exposure to a broad range of U.S. high-yield corporate bonds.

Most final distributions are made to investors within three to five business days of an ETF's delisting, though some have taken a week or longer.

For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.

What are three disadvantages to owning an ETF over a mutual fund? ›

Instead of trying to time the market and guess the perfect moment to invest (which almost never works), you make a regular investment at the same time each month. When you do this, timing doesn't matter too much. If the ETF is lower one month, you'll end up buying more shares for your money.

But to be clear, Ramsey's all in favor of using ETFs when used properly. For investors who can use ETFs as part of a long-term, buy-and-hold investment program, rather than as trading vehicles, Ramsey has nothing bad to say about them.

While Fidelity wins out overall, Vanguard is the best option for retirement savers. Its platform offers tools and education focused specifically on retirement planning.

Implied liquidity is calculated by extrapolating the trading volume of the underlying assets into ETF terms. This involves considering the ETF's creation unit size, which represents the number of ETF shares that can be created or redeemed by exchanging a basket of underlying securities.

A favored measure is tracking difference—a statistic that looks at how far an ETF has lagged its benchmark, on average, over a one-year period. Tracking difference incorporates the effects of an entire range of management decisions, from securities lending to optimization decisions.

The bid-ask spread, or the difference between what a seller is willing to take and what a buyer wants to pay, is a good measure of liquidity. Market trading volume is also key. If the bid-ask spread is too large on a consistent basis, then the trading volume is probably low, and so is the liquidity.

The measures include bid-ask spreads, turnover ratios, and price impact measures. They gauge different aspects of market liquidity, namely tightness (costs), immediacy, depth, breadth, and resiliency.